Self-employed parents: Tax-Free Childcare covers half-term

A self-employed parent who pays £250 for a week of half-term holiday club can pay £200 of it through Tax-Free Childcare and have the government add the other £50. The top-up is £2 for every £8 you pay in, up to £500 a child every three months. Holiday clubs count, as long as the club is registered and has signed up to the scheme.

Half-term for many London schools starts on Monday 26 October, so this is the week the clubs get booked. Check your own school's dates. If you work for yourself, three of the scheme's tests work differently for you than for an employee, and each is worth a look before you pay.

What the account pays for

You open a childcare account, pay money in, and the government's share arrives at the same time, usually within one working day. You then pay the provider from the account. The gov.uk guide lists childminders, nurseries, nannies, after-school clubs, breakfast clubs and holiday clubs, plus extras such as meals and trips where the provider supplies them.

The child must be 11 or younger, or 16 or younger if disabled, when the cap rises to £1,000 every three months. The provider must be registered and signed up to Tax-Free Childcare. A football camp in the local park may be both, or neither, so ask before you book.

The earnings test, when income is lumpy

Each parent must expect to earn at least £2,643.68 over the next three months if they are 21 or over. That is 16 hours a week at the National Living Wage of £12.71 an hour.

Freelance income rarely arrives in tidy quarters, and the rules allow for it. If you are self-employed and do not expect to earn enough in the next three months, you can use an average of what you expect to earn over the tax year instead. At today's rate the annual equivalent is £10,574.72.

If you started your business less than 12 months ago, the minimum does not apply at all. A designer who went freelance in the spring can qualify on a quiet first autumn.

Illustration, not a real client: a freelance wedding photographer in Forest Hill earned most of this year's income over the summer and has little booked before the spring. Over the tax year she expects to earn about £22,000. Her next three months fall short of £2,643.68, so she uses the annual average, which passes easily. Her partner works full-time and passes on his salary.

Some income does not count towards the minimum. Dividends, interest, rental income and pension income are all excluded, so a company director who takes most of their pay as dividends needs enough salary to pass.

The £100,000 ceiling

You cannot claim if either parent expects adjusted net income over £100,000 for the current tax year. For a self-employed Londoner having a strong year, that line can arrive late, because it is judged on the whole year, and a strong last quarter can push it over.

Adjusted net income is your total taxable income less certain reliefs, and two of those reliefs are in your hands. Personal pension contributions come off, grossed up, and so do Gift Aid donations.

Illustration, not a real client: a freelance developer in Hackney expects £104,000 for the year. She pays £4,000 into a personal pension, which the provider grosses up to £5,000. Her adjusted net income falls to £99,000, which keeps her family inside the childcare scheme and keeps her full Personal Allowance, which starts to shrink above £100,000.

Every three months, or it stops

You must sign in every three months to confirm you are still eligible. Miss it and Tax-Free Childcare stops. For a self-employed parent, that reconfirmation is also the moment to look again at your estimate, because both the earnings test and the £100,000 test turn on what you expect, and expectations move.

One more rule catches people. You cannot get Tax-Free Childcare while claiming Universal Credit, so a household on Universal Credit needs to work out which is worth more before switching.

Before you book

Ask the club whether it is registered and takes Tax-Free Childcare. Then put a number on what you expect to earn this tax year, because that one figure decides the earnings test and the £100,000 test. Our self-employed tax calculator turns a year's expected profit into tax and take-home, which is a quick way to see how close you are to either line.

The top-up looks small on one week of holiday club. Over a year of clubs and childminders it is up to £2,000 a child, and it only arrives if you pay through the account.

About the author

Harvey Dhillon is Founder and CEO of Zmartly, a UK accountancy firm for small businesses. He grew up in West London and began his career in investment banking finance at Barclays, before going full-time on Zmartly in 2020. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Emily Wassmansdorf on Unsplash.