Increasing numbers of parents are contributing to government-backed Tax-Free Childcare (TFC) accounts to help with childcare costs but many eligible families are still not claiming or making use of the money.
The government launched TFC accounts in 2017 to replace childcare vouchers.
Parents can get up to £2,000 a year in cash from the government to help pay for childcare including childminders, nursery costs and after-school clubs.
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The latest HMRC figures show the government spent £48.7 million on top-ups for families in September 2023, £4.3 million higher than a year before.
But the number of families using the accounts actually dropped during September and fewer than 60% of open accounts have been regularly used since the scheme was launched.
Rachael Griffin, tax and financial planning expert at Quilter, says this underutilisation shows that many families, including those with children who could greatly benefit from such support, are not fully taking advantage of the available funds.
She says some parents who are eligible for Universal Credit or Tax Credits may open accounts but find they can save more money using the childcare elements of these benefits instead.
“The amount of money available from government has remained the same since 2017 despite childcare costs spiralling during that time,” she adds.
“While every little helps, the overly complex system as it stands will inevitably put off some parents.
“Tax-Free Childcare is not benefiting enough families. Many who have opened accounts are not using them, and there are still eligible families who haven't even opened an account. More needs to be done by the government to both increase its funding to make it fit for purpose and advertise it better.”
Approximately 456,000 families used TFC accounts for 547,000 children in September 2023,according to HMRC, compared with 470,000 families using the accounts for 569,000 children in June 2023.
These figures are skewed by the summer holidays and because payday for many in September was on a weekend so would have filtered through to October, HMRC said.
However, there are still families not making use of the accounts.
The data shows account use decreased from 54% in June 2023 to 44.9% in August, before rising again in September 2023 to 50.1%.
The school holidays will influence that but over the over the long-term, fewer than 60% of accounts are used.
This may be because some families open an account for a child and then decide not to use it or will use one that has already been open for a sibling.
Laura Suter, head of personal finance at AJ Bell, said government campaigns and media coverage has boosted TFC awareness but usage is below expectations from the Office for Budget Responsibility when the scheme first launched.
“The latest figures show around 446,000 families used tax-free childcare each month over the past year, costing the Government £586 million over the past 12 months,” she says.
“That doesn’t seem too shabby, but it’s a far cry from the £1 billion a year that the OBR estimated the Government would be spending on the policy when it was launched.
“In total the OBR estimated the government would shell out £4 billion over the first five years the accounts were in circulation, but the reality is that in that period it spent just over £1 billion.”
How Tax-Free Childcare accounts work
TFC accounts were launched in 2017 to help parents with children up to age 11 pay for childcare services.
Unlike its childcare voucher predecessor, the money isn’t taken as a form of salary sacrifice from your pay packet so can’t be used to reduce your tax.
Instead, parents have to open a TFC with HMRC for each child.
Your child must be under age 11, or 17 if they are disabled.
Once an account is open, the government will contribute £2 for every £8 contributed.
If you pay in £800, the government will give you £200 up to an annual topup limit of £2,000.
The topup limit for parents of a disabled child is £4,000 a year.
Parents must be working and earning the minimum wage for 16 hours a week or more but there is a £100,000 salary cap.
This applies to each parent so if one earns £105,000 but the other doesn’t work, you can’t get the vouchers, while a couple earning £90,000 each can.
“Lots of parents aren’t aware of the scheme, don’t understand how it works or don’t realise they are eligible and miss out on the invaluable support as a result,” adds Suter.
“Childcare costs will be a key battleground the election and it wouldn’t be surprising to see the tax-free childcare scheme consigned to the scrapheap in favour of a simpler, more generous scheme to help parents with childcare costs that often prevent them returning to work after having children.”
Griffin adds that a simplified approach which consolidates all forms of childcare support into a single online account for each child would help parents navigate the system better and take advantage of what’s on offer for them.
Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.
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