The Low Incomes Tax Reform Group (LITRG) has warned parents to thoroughly research the way they get help with childcare costs this summer as the consequences of getting it wrong could see them out of pocket.

The Government’s latest initiative to support people with the cost of childcare, the Tax-Free Childcare (TFC) scheme, was opened to all qualifying families in February 2018.

TFC is a childcare support scheme that replaced, for new claimants, the tax relief associated with directly contracted childcare and childcare vouchers offered by employers.

For each 80p that you pay into your childcare account, the government will pay in 20p – up to a maximum of £500 (£1,000 if the child is disabled) per three-month entitlement period.

Although take up of TFC is growing, just 125,000 families used it for 151,000 children in March 2019, according to HMRC. But this compares with 47,000 families for 58,000 children in March 2018.

Victoria Todd, head of LITRG team, said: “It is welcome that the government is promoting TFC because it is clear from the current take-up statistics that many potentially eligible families are missing out on the scheme’s valuable support. However, we are concerned about the risk that parents could mistakenly make themselves worse off if they claim TFC without understanding the implications for existing support and benefits.”

Tax-free childcare versus tax credits or Universal Credit

The LITRG pointed out that parents cannot claim TFC as well as tax credits or universal credit. If they do submit a claim for TFC then their whole tax credits award (both child tax credit and working tax credit) will stop automatically. The same applies for Universal Credit.

Similarly, you cannot benefit under both TFC and childcare vouchers or directly-contracted childcare at the same time.

The tax and National Insurance relief for childcare vouchers and directly-contracted childcare was withdrawn for new applicants from 4 October 2018. So anyone giving their employer notice to leave an existing scheme to claim TFC instead will have their vouchers or directly contracted childcare stopped and will not be able to re-join.

Todd said: “Whether to claim TFC instead of other forms of childcare support is complicated. This is especially the case now that Universal Credit full service has rolled out across the UK and as a result most people can no longer make brand new claims for tax credits and other benefits that Universal Credit replaces. If you currently claim tax credits and you make a claim for TFC, your tax credits will automatically end, but if you have made the wrong decision you are unlikely to be able to reclaim tax credits and instead may have to claim Universal Credit. This could be better or worse for you depending on your circumstances.

“We urge parents to make sure they understand their situation before making a decision, and seek welfare benefits advice if they need to.”