More than a million families are missing out on tax-free childcare: are you eligible?

Working parents struggling to afford childcare could be eligible for a boost of up to £2,000 from a government scheme. Yet only around 8% of eligible families have signed up, new figures from HMRC reveal.

The government's tax-free childcare scheme launched more than two years ago, but only 125,000 families are currently benefiting.

We explain what tax-free childcare is, whether you're eligible and what alternative childcare help is available for parents.

Why aren't more people signing up to tax-free childcare?

Ahead of the launch of tax-free childcare, the government published a risk assessment report which estimated that up to 1.5 million families would qualify.

So, why have only a small fraction of these families signed up?

First, many people are already signed up to the childcare voucher scheme, which pre-dates tax-free childcare and closed to new applicants in October 2018.

In a report from April 2018, the Childcare Voucher Providers Association stated that 780,000 parents were then using childcare vouchers. Employers can still offer them to anyone who signed up before October, so it's likely that a lot of people have stayed with this scheme.

Under the scheme, parents can save up to £933 in the 2019-20 tax year, equating to £2,860 worth of vouchers.

Childcare vouchers are paid before tax through salary sacrifice schemes. It means parents will pay less income tax and National Insurance, and therefore receive more of their paycheck each month. Tax-free childcare doesn't have this advantage.

There could also be an issue of awareness. Employers offering childcare vouchers would likely advertise them as a benefit to new employees. To sign up to tax-free childcare, however, the onus is on the individual to apply. It may be that eligible parents simply aren't aware of the service.

That being said, the number of people signing up to tax-free childcare is growing, with 34,000 new applicants between December 2018 and March 2019 alone. But it's still way off the government's estimations.

How does tax-free childcare work?

To be eligible, both you and your partner (if you have one) must be either employed, on parental leave, sick leave or annual leave. If you're in work, you must both earn at least the national minimum wage or living wage for working at least 16 hours a week.

The government will reimburse you 25% of what you pay a childminder. So, if you spend £100 a week, the government will pay you £25 via an online account. The childcare you're paying for must be registered and approved.

The maximum payout you can receive is £2,000 per year - you would need to be spending £8,000 on childcare to warrant that amount.

Unlike childcare vouchers, this scheme is available to self-employed workers. Plus, if you're self-employed and started your business less than 12 months ago, the earnings limit doesn't apply.

The childcare scheme also has a few downfalls, including:

• It doesn't apply to foster children.
• It's only for children aged 11 or under.
• Both you and your partner must be working to apply.
• You can't claim if either you or your partner earns more than £100,000.

Find out more:tax-free childcare and other ways to save

What alternative childcare help is available?

Child benefit

While not specifically for childcare, you can spend your child benefit payments on anything you need while raising a child, including childcare costs.

In the 2019-20 tax year, you'll receive £20.70 a week for your eldest child, and an additional £13.70 for any additional children.

Strictly speaking, child benefit isn't means-tested, but if you or your partner earn more than £50,000, you may have to pay tax on your child benefit payments.

To find out how much you'll get, you can use our calculator below.

Working tax credit childcare element

There is a childcare element of working tax credit that you may be eligible for if you're claiming the benefit.

This is an extra allowance for working parents, but your child must be enrolled in approved childcare. This means a registered childminder, nursery or play-scheme; an out-of-hours club on school premises; or a childcare scheme run by an approved provider.

You can claim up to 70% of childcare costs, to a maximum of £175 a week for one child, or £300 a week for two or more children.

Find out more:working tax credit explained

Free education and childcare for two-year-olds

Starting the term after your child turns two, until the term after they turn three, this initiative gives up to 15 hours a week of free childcare for up to 38 weeks a year.

Only those in England already claiming some means-tested benefits are eligible, and availability will depend on what's offered by your local council.

15 and 30 hours free childcare for three and four-year-olds

This scheme applies to all children in England that fall into this age category.

You'll get 15 hours of free childcare a week for 38 weeks a year. If you or your partner are in work and earn at least the national minimum wage or living wage, you may be able to get 30 hours a week.

Again, it depends on what your local council can offer, but this can be claimed alongside benefits, tax-free childcare and childcare vouchers.

Universal Credit

If you're eligible to claim Universal Credit and have children, you may qualify for the 'child element' of the benefit.

It works in a similar way to the childcare element of working tax credit, but what you'll get is slightly different.

You can receive up to 85% of costs up to a maximum of £646.35 for one child, or £1,108.04 for two or more children.

Find out more:how Universal Credit is calculated

Editor's note: further clarification was added to explain that parents can be paid up to £915 a year Childcare Vouchers, but that the value of this payment can equate £2,860 a year.