Two weeks ago, I shared with you a way to increase your childcare benefit entitlement using pension contributions.
Today, I want to share with you my second important tip for parents and tell you about tax-free childcare.
These 2 tips combined are probably the first two things new parents should look at from a financial perspective.
They are quick, easy wins that can save you a lot of money. That’s kind of the point of this blog.

Before I became a dad, I asked other parents what the biggest expenses were and how I could reduce them.
A lot of them mentioned prams and car seats (the amounts are crazy) and childcare. While we did find a way to get a car seat and pram for very cheap, it seemed like childcare was a fixed cost, which couldn’t be reduced. Enter my tax accountant friend.

He told me about tax-free childcare and I want to share this with you. You can get almost all the information on this GOV.UK website and I recommend you take the time to read it. However, in today’s post, I will share my own experience with it, my mistakes (which I hope you’ll avoid), and information that I had to call to find out (so you don’t have to).

Who’s eligible for tax-free childcare?

There are 2 main criteria (but I recommend reading the GOV.UK website for more details):

  • “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.”*
    If this is you, you can stop reading here. Alternatively, you can keep reading and learn something new (fun). The third, most interesting option, is to decrease your adjusted net income. You can do that using pension contribution. It is the same method I mentioned for child benefit.
  • “You’ll need to expect to earn a certain amount over the next 3 months. This is at least the National Minimum Wage or Living Wage for 16 hours a week on average. For example, over the next 3 months, you expect to earn at least £1,813.76 – the National Living Wage for people over 25. If you have a partner, they’ll need to expect to earn at least this much too.”*

Basically, there is a minimum and maximum earning limit. The maximum applies to the higher earner of the 2 parents and the minimum applies to both.

The actual benefit of tax-free childcare

Each quarter, the government will add 25% of your contribution (up to £500 per quarter) to your child’s tax-free childcare account.


If you contributed £800 in one quarter, the government will add £200 (800*25%) to your child’s tax-free childcare account.
However, if you contributed £3,000 in one quarter, 25% will be £750 but the cap is £500. That means that the government will add £500 to your child’s tax-free childcare account.

This means that in order to max this benefit, you’ll have to contribute £2,000 each quarter in order to get the full £500 (2000 * 25% = 500).

“OK, I got the maths, but what can I use` if for?”
The GOV.UK website says you can use it for any “approved childcare”. The main one here is nurseries, which is a huge cost for new parents.

Tax-free childcare
Tax-free childcare- let the government pick up 20% of the bill

How to get the free £500 per quarter

First, you’ll you open a tax-free childcare account for your child, you can do that here.

Once you’ve done that, it is like a bank account (it even has a sort code and account number).
Once your child’s tax-free childcare account is up you can transfer money to it each quarter.

My first mistake

When I first heard about it I had one important question, for which I could not find an answer online:
“Can I open an account from the moment my daughter was born or from the moment she starts childcare?”
So I phoned them and asked.

I want to sidetrack here for a moment and applaud HMRC’s customer service, I phoned them several times and they are super patient and helpful. I highly recommend phoning them whenever anything is unclear.

Ok, we’re back. They told me I could start putting money in the account from the moment she was born!

“Why is this a mistake?”
Because I only did that when she was 3 months old. That means I missed/lost out on £500. Please don’t make that mistake yourselves.

My second mistake

Once a quarter you need to reconfirm your details haven’t changed and you have a certain time window to do so. It is a very simple process that takes a couple of minutes. However, in order to log in to your child’s tax-free childcare account, you need to enter a one-time password sent to you by text. I was in Israel at the time and wasn’t willing to pay my mobile provider’s extortionate fees. That meant I missed that window and I lived to tell you what happens when you do.

If you miss that window you need to send them by post (!) payslips for you and your partner and some other documents which I can’t remember. The major issue is that until they reconfirm your details, your new period (the 3 months in which you are entitled to a bonus of up to £500) doesn’t start. In total, with the period we were in Israel and until I sent the letter- I was 2 months late. if 3 months are worth £500, 2 months are worth £333.33 (2/3*500). That means I missed/ lost out on £333.33. Again, please don’t make that mistake yourselves.

In total, I missed out on £833.33 and I hope that by reading this, you will be smarter than I was.

The maths- why you should open a tax-free childcare account from birth

Ah, everyone’s favourite part.

Let’s kick off with a few assumptions:
1. Ok, let’s assume Lazy FI Couple have a baby- congratulations!
2. Now, let’s assume that Lazy FI baby goes into childcare from the age of 9 months until it is 3 years old (then you start getting all kind of benefits and the big part of that expense is almost over. That means we are looking at 21 months which are 7 quarters.
3. One more assumption- childcare costs £1,000 a month.

Scenario 1: Wait until Lazy FI baby starts childcare

In this scenario, Lazy FI Couple wait until Lazy FI Baby starts childcare before they contribute money into the tax-free childcare account.

As childcare costs £1,000, that’s £3,000 per quarter (1000*3). However, the maximum bonus is only £500 per quarter. That means that the government will only cover up to £500 and Lazy FI Couple will have to cover the remaining £2,500 per quarter. In total, 7 quarters costs £21,000, which are split in this way:
£17,500 (2,500*7) by Lazy FI Couple, that’s 83.33% of the cost (17,500/21,000).
£3,500 (500*7) by the government, that’s 16.67% of the cost (3,500/21,000).`

Scenario 2: Start early (from birth)

In this scenario, Lazy FI Couple start contributing money into the tax-free childcare account from the moment that Lazy FI Baby is born.

We know that for every £2000, we put in, the government will put in £500. That means that from every £2,500 of childcare costs, 20% (500/2500) will come from the government. This means that we will aim to get 20% rather than the 16.67% we got in scenario one.

We know that in total, childcare will cost £21,000. That means we want to contribute only 80% of that amount, which is £16,800 (21000*80%). This will represent £700 of saving! (17,500-16,800).

How do we do that? we have 2 ways:

First way- spread the cost

We have 3 years, which are 12 quarters, if we divide £16,800 by 12 we get £1,400. That means that each quarter, from birth, Lazy FI Couple will transfer £1,400 to the tax-free childcare account, the government will then add £350 (1,400*25%) which will get them to £1,750. After 3 years, which is 12 quarters, they will have covered the whole £21,000 (1,750*12).

Second way- front-load the cost

As we know the total costs are £21,000 and the maximum bonus Lazy FI Couple can get is £500 per quarter, let’s just maximise it and finish early. Each quarter they will transfer £2,000 to Lazy FI Baby’s tax-free childcare account. The government, in turn, will add their £500 bringing the total to £2,500. After 8 quarters (Lazy FI Baby’s 2nd birthday) the total contributions are £20,000 (2,500*8). That means that next quarter they will only need £1,000 more to cover the total £21,000. If they contribute £800, the government will add £200 (800*25%) to get them to their target.

That’s childcare costs covered until the age of 3 just after Lazy FI Baby celebrates his/her 2nd birthday, a year early!

In both ways, the total cost to Lazy FI Couple was £16,800 which is 80% of the total childcare costs. It’s up to you if you prefer to spread it out or front load the costs and “get it over with” or spread it out.

I prefer getting rid of tasks early and front-loading and so does Lazy FI Mum, that’s just who we are. However, the disadvantage of that method is that the money we front-load just sits there in the tax-free childcare account and not working (compounding) for us by earning yield.

A few random question I received on the topic of tax-free childcare

“How will the government know the money goes towards childcare?”

In your account, you choose from a list of approved providers. I had to find our daughter’s childcare in that list and only then you can transfer money to them.

In addition, just to clarify- you can use this for other things rather than childcare like a registered school, after school clubs and play schemes. You can find full details on what you can use the money for in this link.

“What happens if you have extra money sitting in the account that you won’t use up?”

You can withdraw money easily but the government will take back the corresponding “bonus”. Assuming you never paid more than £2,000 a quarter, that means that all the money you contributed enjoyed a 25% bonus, which will be reduced from your account.

For example, you want to withdraw £1,200 and your balance is £3,000. You can withdraw £1,200- no problem. However, the government will reduce your balance by £1,500 which is the £1,200 you withdrew plus the 25% bonus they gave you, which is £300 (1,200*25%).

You can see other questions answered here.


If you are eligible, do the calculations in advance. Don’t wait for your child to start childcare before opening a tax-free childcare account. I mean, the government is offering to pay 20% of that bill, say “yes”.

I hope you learn from my mistakes and don’t repeat them.

Tax-free childcare mistakes
My mistakes “cost me” over £800, learn from them and don’t repeat them.

Know of other big and easy wins for parents? please let me know in the comment sections, I’m eager to learn from your experience.

* These quotes are from the GOV.UK website