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Universal Credit claim and Tax-free Childcare: What you need to know

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With millions of people claiming Universal Credit and with redundancies on the horizon, parents may worry what this means when it comes to their Tax-Free Childcare account.

More than five million people are claiming Universal Credit according to the latest statistics for July.

With this number nearly double reported in February, parents claiming the benefit may wonder what this means for their eligibility for Tax-free Childcare.

Tax-Free Childcare accounts offer a 25% government top-up towards the cost of childcare for parents of under 12s. For every £8 paid in by parents, a further £2 is added by the government, up to a maximum top-up of £2,000 a year.

As the coronavirus pandemic unravelled, HMRC confirmed parents suffering a loss of income due to Covid-19 would still be eligible – usually working parents need to earn at least £139/week.

Income from being furloughed, or from the Self-employment Income Support Scheme would count towards making the minimum income test for Tax-Free Childcare.

The only exception is if you’ve recently started claiming Universal Credit. You can’t get Tax-Free Childcare at the same time as claiming Working Tax Credit, Child Tax Credit, Universal Credit or childcare vouchers.

Universal Credit and Tax-Free Childcare

As parents can’t claim both Universal Credit and Tax-Free Childcare at the same time, spoke to both HMRC and the Department for Work and Pensions (DWP) to find out what you need to know and do.

Our Q&A below outlines key points:

Q) I have a Tax-Free Childcare (TFC) account. Can I apply for Universal Credit (UC)?

A) Yes. If you have a TFC account and experience a change of circumstances, including due to coronavirus, you can apply for UC. HMRC said this does not impact your current TFC entitlement period.

Q) I’m about to make a UC claim but have a TFC account. What do I need to know?

A) You can continue to deposit money and get the government top-up and HMRC confirmed you can continue to spend money on childcare necessary for work.

Parents need to reconfirm their eligibility every three months and so you won’t be able to confirm for TFC at the end of the eligibility period – this is whether your UC payments have started or not. The account becomes a ‘pay only’ option.

However, money in the account will need to be used up within two years of claiming Universal Credit, according to DWP. HMRC – rather than the parent – closes the account.

Q) I have both a TFC account and am eligible for the 30 Hours Free Childcare scheme. Can I claim UC and continue to receive 30 Hours Free Childcare?

A) Yes. If you are claiming UC, you may be able to get up to 30 Hours Free Childcare (1,140 hours per year, which you can choose how you take) if your child is three to four years old.

You’ll need to reconfirm your eligibility for the childcare scheme every three months.

Q) I understand I can’t claim both UC and TFC. What if my situation changes? How will I know which is the better scheme for me?

A) Claimants won’t be eligible to open a TFC account if they are receiving, or have any outstanding claim to receive, any element of UC.

But, you can move between TFC and UC as your circumstances change, provided you meet the eligibility criteria of each scheme.

DWP signposts parents to the government’s childcare calculator to help them see what help is available. Alternatively, you can call HMRC’s childcare service helpline on 0300 123 4097.

There’s also guidance on UC and TFC on and the Understanding Universal Credit website. DWP added that work coaches are made aware of the government’s childcare schemes and how they work with UC, “ensuring they are able to support parents”.

However, DWP added that where a parent doesn’t experience a chance of circumstances, they will be limited to the number of times they can switch between the schemes.

Q) I’m scared I may need to pay money back. In what scenario could this happen?

A) DWP said an overpayment of TFC may arise if the claimant doesn’t notify HMRC at the correct time that they have opened a UC claim.

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