Striking a balance between work and family responsibilities can be a challenging feat, especially for self-employed individuals who may not have access to employer-supported childcare schemes. This guide elaborates on how to claim childcare costs when self-employed and outlines the childcare options available for self-employed individuals in the UK, including tax reliefs, government schemes, and HMRC regulations for the current tax year.
By claiming certain costs, which are called tax-deductible costs, self-employed can reduce their tax liabilities. However, many self-employed parents wonder whether they can claim childcare costs as a business expense or access government support.
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.
Can self-employed individuals claim childcare costs as a business expense?
In a nutshell, generally, self-employed individuals cannot claim childcare costs as a tax-deductible business expense. It is because, in agreement with HMRC guidelines, only expenses that are “wholly and exclusively” used for business purposes can be deducted from taxable profits.
Now, since childcare is classed as a personal expense instead of a business, it does not qualify for tax relief under self-employed business expenses.
Now, let’s dig a little deeper to understand the idea. In the UK, childcare costs are not tax-deductible or claimable business costs, neither for the self-employed nor for small business owners.
If you are wondering why, it is because HMRC believes that self-employed workers or small business owners are better off or rich enough to bear the costs of their own childcare.
Yes, we entirely understand that it just appears unfair and absurd since not all self-employed people or small business owners are financially adequate, not to forget that childcare can be costly enough sometimes.
Nevertheless, it is what it is. If you’re self-employed or a small business owner, you are on your own to take care of your childcare costs. Therefore, being self-employed, if you have children, it is rational to budget for childcare costs since HMRC will be of no assistance here.
However, there are several government support schemes available to self-employed individuals to help manage childcare costs.
Explaining the government schemes for childcare support:
Unlike employees, self-employed individuals cannot claim childcare costs as a business or a tax-deductible expense. However, helpfully, the UK government provides several schemes through which you can learn how to claim childcare costs when self-employed.
The following schemes help self-employed parents with childcare expenses and effectively reduce the cost of childcare, functioning similarly to tax relief.
Tax-free childcare scheme:
Self-employed individuals can apply for the Tax-Free Childcare (TFC) scheme, which allows eligible parents and working families to receive up to £2,000 per child per year (£4,000 for disabled children) towards childcare costs.
With a tax-free childcare scheme, eligible families can support childcare costs for children 11 years old or younger. Primarily, the government introduced this scheme to help get more parents back into work by helping them combat the rising childcare costs.
The tax-free childcare scheme gives up to £500 every three months (or up to £2,000 per year) to each of your children under the age of 11 to help with the childcare costs. If your child has a disability, it increases to £1,000 every three months ((up to £4,000 per year).
Furthermore, the government will contribute £2 for every £8 you put into the account, as long as it is with an approved childcare facility. Notably, the approved childcare facilities include nurseries, childminders, after-school clubs, nannies and other approved childcare providers.
Next, it is also crucial to understand how these childcare providers get approved. It is compulsory for a childcare provider to meet specific criteria, such as:
- They must be signed up to the government’s childcare scheme.
- They must be registered with a regulator such as Ofsted.
You can find out more about approved childcare by visiting the government website.
Need Help or Have a Query? Get in touch with our professionals at AccountingFirms. Connect with the Best Accounting and Tax Experts near you in just 3 minutes – Register now for Free!
Another noteworthy fact is that when a self-employed worker employs a nanny or childcare provider, they must register as an employer with HMRC and operate PAYE (Pay As You Earn) to deduct tax and National Insurance contributions (NICs) from their wages. In addition to the approved childcare providers, HMRC also allows the funds to be used towards approved:
- After-school clubs
- Play schemes
- Holiday clubs
- Summer camps.
Eligibility criteria for tax-free childcare scheme:
The tax-free childcare scheme is available for children who are aged 11 or under 17 if disabled and who are living with you. However, their eligibility will automatically terminate on 1st September after their 11th birthday.
Similarly, you must earn at least the equivalent of 16 hours per week at the National Minimum Wage or Living Wage. Take note that your earnings must not exceed £100,000 per year.
Essentially, for a disabled child, you may claim £4,000 per year until they turn 17 years of age. However, their eligibility depends on the following:
- They receive Disability Living Allowance, Personal Independence Payment or Armed Forces Independence Payment
- They are certified as blind or severely visually handicapped.
How does a tax-free childcare scheme work?
For every £8 you deposit, the government adds £2 (up to the yearly limit per child). You will use your online HMRC childcare account to make electronic payments into the scheme. For your convenience, parents and other family members, like grandparents and employers are also welcome to contribute to the account.
You can withdraw money to pay for childcare at any time, for as long as the provider is registered under this scheme. It implies that if you make a contribution of £80 into your childcare account, the government would increase it with an additional £20 to give you £100 to spend on childcare.
However, it is worth stressing here that the government’s contribution is limited to £2,000 per child, per tax year. More importantly, the government contribution is not available all at once. Instead, the government limits quarterly contributions at £500. In addition, for children with disability, the annual limit increases to £4,000 (£1,000 per quarter).
Moving ahead, while you can withdraw the money you have contributed into your account when the need arises, the government’s contribution will be withheld if the amount is not meant for childcare.
Similarly, you will be ineligible to sign up for this scheme if you are already receiving Universal Credit, Working Tax Credit, or Child Tax Credit. Consequently, if you make an attempt to claim Tax-Free Childcare while claiming tax credits, your tax credit claim will terminate.
Ultimately, once you have a child who qualifies for tax-free childcare, you can sign up for other children simultaneously.
To apply for the tax-free childcare scheme, visit the government’s website.
30 hours free childcare scheme:
The 30-hour free childcare scheme is another significant option for individuals learning how to claim childcare costs when self-employed. How? In summary, the government announced 30 hours per week of free childcare for qualifying parents, which goes up to 38 weeks in a year for children aged 9 months to 4 years.
Alternatively, self-employed parents with children aged 3-4 years can claim up to 30 hours of free childcare per week during term time (or 1,140 hours per year if spread over the full year).
For greater clarity,
- If the child is between the ages of 9 months and 2 years, parents can receive 15 hours of free childcare per week of the year during school term time for 38 weeks.
- Similarly, if your child is 3 to 4 years old, you may be eligible for 30 hours of free childcare per week for 38 weeks of the year (during school term).
It is worth pointing out that you can get free childcare for up to 52 weeks a year if you choose to take fewer hours over more weeks.
However, it is imperative that childcare is an approved childcare provider and it
stops when your child starts in reception class (or reaches compulsory school age, if later). Further down the line, while childcare is free, you might have to bear some extra costs, like:
- Meals.
- Nappies.
- Additional hours.
- Additional activities, including trips.
Eligibility:
- It is mandatory for both parents (or the single self-employed parent) to earn at least the equivalent of 16 hours per week at the National Minimum Wage.
- Earnings should not exceed £100,000 per year.
- The childcare provider must be registered with Ofsted.
- Applications can be made through the HMRC childcare service.
Childcare voucher scheme:
Receiving childcare vouchers is a useful tax-saving option when considering how to claim childcare costs when self-employed. Childcare vouchers are an employee benefit that many employers provide to their employees.
It indicates that the employer can pay for childcare and deduct the costs from the employee’s gross wages. Subsequently, with childcare vouchers, employees could save the tax and NICs on their childcare costs.
Now, it is utterly important to mention here that the Childcare Voucher Scheme closed to new applicants in October 2018. For instance, newcomers are no longer allowed to claim Childcare Vouchers since these vouchers were closed to newcomers on 4th October 2018.
However, if you joined this scheme before that date and are still with the same employer, you may still benefit from this tax-saving scheme if your employer is still offering them.
Moreover, under HMRC guidelines, you can keep getting vouchers as long as:
- Your wages were adjusted on or before 4 October 2018
- You work for the same employer and they continue to run the scheme.
- You do not take an unpaid career break of longer than a year
- You can take up to £55 a week of your wages, which you are not required to pay tax or National Insurance on.
- How much you can take is based on the amount you earn and when you join the scheme.
AccountingFirms makes it seamless to search for the best fit for your accounting and taxation needs by applying filters and getting the most customised result. Let’s hire the best accountant now!
Bottom line:
The crux of the matter is while self-employed individuals cannot claim childcare costs as a tax-deductible business expense, they can still reap the benefits from various government support schemes, including tax-free childcare, 30 hours of free childcare, and Universal Credit for Childcare.
Therefore, by understanding these schemes and meeting the eligibility criteria, you can learn how to claim childcare costs when self-employed to alleviate the financial burden of childcare costs.
In addition, for self-employed individuals juggling tax obligations and business responsibilities, seeking professional help can unburden their shoulders from bearing all liabilities at once.
To this end, the registered accountants at Accountingfirms can offer you all-inclusive tax and accounting services. Being cost-effective and location-based, the certified accountants can seamlessly help manage your tax affairs, register your business with HMRC, and ensure perfect compliance with childcare support schemes.
Hence, get expert assistance today to streamline your financial obligations while you solely focus on booming your business!
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.