- You cannot get Tax-Free Childcare if you are on Universal Credit, so you have to choose.1
- Universal Credit pays back up to 85% of registered childcare costs, up to £1,071.09 a month for one child or £1,836.16 for two or more.1
- Tax-Free Childcare adds £2 for every £8 you pay in, up to £500 per child every 3 months (£2,000 a year), or £1,000 (£4,000 a year) for a disabled child.2
- UC childcare usually pays more if you would still get some Universal Credit with it. Tax-Free Childcare wins when your earnings or savings would leave your UC award small or nil.
How do the two schemes compare?
The schemes are built differently. Universal Credit adds a childcare amount to your maximum award, and then your earnings reduce the whole award through the 55% taper.4 Tax-Free Childcare is a flat top-up into an online account that does not depend on how much you earn, as long as you pass its earnings test and stay under its income limit.
| UC: share of costs paid | Up to 85% |
| UC: monthly maximum, 1 child / 2+ children | £1,071.09 / £1,836.16 |
| UC: hours you must work | No minimum |
| TFC: top-up | 20% (£2 per £8) |
| TFC: maximum per child a year | £2,000 (£4,000 disabled) |
| TFC: minimum earnings each, 3 months (21+) | £2,643.68 |
| TFC: income limit each | £100,000 |
The Tax-Free Childcare earnings test is expecting to earn at least the equivalent of 16 hours a week at the National Minimum Wage or National Living Wage over the next 3 months, which for someone 21 or over in 2026/27 is 16 x £12.71 x 13 weeks = £2,643.68.3
Worked example 1: childcare costs of £900 a month, lone parent
Sam works part time and pays a nursery £900 a month for one child aged 3. Sam's UC award is large enough to absorb the childcare amount in full.
| UC childcare: 85% of £900 | £765.00/mo |
| TFC: 20% of £900 is £180/mo, but capped at £500 a quarter | £166.67/mo |
| UC pays more each month by | £598.33 |
For most lower-income working parents on Universal Credit, UC childcare is far more generous, and there is no minimum number of hours you have to work.1
Worked example 2: a couple near the top of UC
Jo and Alex both work, rent for £1,000 a month (all eligible), and pay £1,000 a month for one child's nursery. The child was born after 6 April 2017.
| Couple standard allowance (25+) | £666.97 |
| Child element | £303.94 |
| Housing element | £1,000.00 |
| Childcare element: 85% of £1,000 | £850.00 |
| Maximum UC | £2,820.91 |
| Take-home pay £5,200: (£5,200 - £427) x 55% | -£2,625.15 |
| UC payable | £195.76/mo |
| Tax-Free Childcare instead (capped) | £166.67/mo |
Here UC still wins, but only by about £29 a month. If their take-home pay were £5,300, the taper would take £2,680.15, UC would fall to £140.76, and Tax-Free Childcare at £166.67 would be the better choice. Without the childcare element they would get no UC at all, so the childcare amount is effectively all they receive.
Savings matter too: with £16,000 or more in savings you cannot get Universal Credit, so Tax-Free Childcare is the only one of the two open to you.
What about free childcare hours?
Funded hours sit alongside both schemes. In England, working parents can get up to 30 hours a week of funded childcare in term time for children from 9 months to school age, using the same earnings test and £100,000 limit as Tax-Free Childcare, and you can get them while claiming Universal Credit. Funded hours cut the bill you pay, so they also cut the amount either scheme pays back. Scotland, Wales and Northern Ireland run their own schemes.
How do I switch between them?
If you are on Tax-Free Childcare and start a Universal Credit claim, stop using the childcare account for your top-ups. You can withdraw the money you paid in, but the government top-up on anything you withdraw goes back to HMRC, so it usually makes sense to spend the balance on childcare first.5
If you are on Universal Credit and your earnings rise so the award is nil, you can apply for Tax-Free Childcare once your UC claim has ended. Remember that Tax-Free Childcare needs reconfirming every 3 months or it stops.2
UC childcare has its own deadline: report each cost in the assessment period you paid it or the one after, with proof such as an invoice and receipt.1 If you need help to pay a deposit or the first month's fees before starting work, ask your work coach.1
- You cannot get Tax-Free Childcare while you are on Universal Credit.1
- UC pays up to 85% of childcare costs, capped at £1,071.09 a month for one child and £1,836.16 for two or more.1
- Tax-Free Childcare adds 20%, up to £2,000 per child a year (£4,000 if disabled).2
- Tax-Free Childcare needs each parent to expect to earn at least 16 hours a week at minimum wage, and no more than £100,000 adjusted net income.3
- UC childcare can cover children until 31 August after their 16th birthday; Tax-Free Childcare until 11 (16 if disabled).12