Are you entitled to help with childcare as a contractor?

Childcare costs can be extremely expensive and be a real drain on working parents’ finances. In this blog we explore whether you can get help with childcare costs if you’re a self-employed contractor or if you contract through a limited company and what support is available from the government. Many contractors are missing out on this useful support, so read on if you’re not currently claiming for childcare as a contractor.

Working out childcare costs

Being a contractor is no different when it comes to childcare costs, you need to weigh up the pros of cons of your earnings compared to the cost of childcare. However, when doing this, you should factor in any government help that may be available.

Childcare vouchers

The Government closed the childcare voucher scheme to new entrants on 4th October 2018. This means that if you’re a parent looking to join childcare vouchers and get tax free childcare vouchers for the first time that option is no longer available to you. But don’t worry all is not lost!

If you make an application for Tax-Free Childcare while receiving childcare vouchers, your vouchers will end and you will not be able to re-apply. So consider carefully which scheme you are better off using before deciding to apply for Tax-Free Childcare.

Tax-free childcare scheme

Tax-Free Childcare is a government initiative that pays 20% of childcare costs up to a maximum of £2,000 each year (£4,000 per year for a disabled child). This means the government will ’top-up’ the amount you pay into a Tax-Free childcare account. It works by the government adding 20p onto every 80p that you personally pay into your childcare account.

Tax-Free Childcare is a UK-wide scheme covering England, Scotland, Wales and Northern Ireland. It can be used towards childcare costs, including nursery, childminder and wrap-around care.

The scheme is open to all parents of children under 12 (or under 17 if disabled). To apply, you must open a Tax-Free Childcare account online.

If your child is disabled, you will need to receive either the Disability Living Allowance (DLA), the Personal Independence Payment (PIP), or the Armed Forces Independent Payment (AFIP), and / or be registered severely sight impaired or fully blind to be eligible.

What type of care can I use tax-free childcare for?

You can use it to pay for approved childcare, for example:

• childminders, nurseries and nannies.
• after school clubs and play schemes.

You will only be eligible if you use registered childcare providers. Check with your provider to see if they’re signed up as a registered childcare provider. If they are not signed up to the scheme, then you won’t be able to benefit from Tax-Free Childcare.

Who’s allowed to use the tax-free childcare scheme?

If you’re a contractor, the scheme is available to both those contractors who are self-employed and those in permanent employment via a limited company.

In order to qualify you’ll need to do the following:

• Be working and/or on parental, sick or annual leave.
• Have a child / children younger than 11 years old.
• Have a child / children who live with you for the majority of the time.

Basic earnings assessment calculations

There are rules around basic earnings assessment that you need to be aware of in order to be eligible and benefit from this help with childcare costs.

• You’ll need to expect to earn at least the National Minimum Wage or Living Wage for 16 hours a week on average over the next 3 months.
• If you have a partner, they’ll need to expect to earn at least this much too.
• If you’re self-employed and do not expect to make enough profit in the next 3 months, you can use an average of how much you expect to make over the current tax year.
• This earnings limit does not apply if you’re self-employed and started your business less than 12 months ago.
• If you or your partner have an expected ‘adjusted net income’ over £100,000 in the current tax year you will not be eligible. This includes any bonuses you expect to get.

Your adjusted net income is your total taxable income before any personal allowances and minus things like Gift Aid.

Income that won’t count towards the basis earnings assessment

Certain types of income will not count towards the minimum amount you must earn to be eligible for help with childcare costs via the Tax-Free Childcare Scheme. These include:

• dividends.
• interest.
• income from investing in property.
• pension contributions.

If you get tax credits, universal credit, a childcare bursary or grant, or childcare vouchers

You cannot get Tax-Free Childcare at the same time as claiming Working Tax Credit, Child Tax Credit, Universal Credit or childcare vouchers.

Which scheme you’re better off with depends on your situation. Use the childcare calculator to work out which type of support is best for you.

30 free hours childcare

You may be entitled to claim 30 hours free childcare for 38 term-time weeks per year, for any children aged three and four. However, if yours or your partner’s annual earnings are above £100,000 per year, you won’t be eligible for the 30 free hours.

Can I claim tax-free childcare while using 30 hours free childcare?

Yes, if you are claiming Tax-Free Childcare, you can still use 15 or 30 free hours childcare. You can use Tax-Free Childcare to cover extra childcare costs you may have.

How do I apply for tax free childcare scheme?

Apply online for Tax-Free Childcare via HMRC website.

If you apply for Tax-Free Childcare and someone else already gets 30 hours free childcare for that child, their 30 hours will stop at the end of the next term. You will be eligible for 30 hours free childcare instead. There are different rules if you are with your current partner or separated, so check these out on the HMRC website.

When applying, you can see whether you’re better off receiving tax-free childcare relief or staying with the childcare scheme. To see if you’re eligible, you’ll need:

• Your UK passport.
• Tax credit information.
• Your P60 or a recent payslip (if you have one).
• Your National Insurance number.
• Your unique taxpayer reference (UTR) number.

Contributing to your childcare online account

You can contribute money to your childcare online account regularly, the government’s contribution will appear shortly after your contribution hits the account, or later the same day.

What you need to tell HMRC regularly

To continue receiving your tax-free childcare, you need to reconfirm your personal details and circumstances every three months. If you don’t, you’ll need to cover gaps of any outstanding childcare payments yourself.

Can other people to pay into my childcare account?

Yes, anyone can contribute to your child’s childcare account, meaning other people such as grandparents can help with financial contributions too. They can transfer money directly into your account.

How dns accountants can help

At dns accountants, we’re expert accountants for contractors, so if you need help and advice about this or any other contractor related questions such as IR35, personal tax for contractors, your accounts or corporate tax planning for your limited company if you have one, we can help.

Please contact us today, call us on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.