- 601,000 families used tax-free childcare for 744,000 children in March 2026, according to HMRC statistics released today
- Usage back on the rise in 2026, after a drop following the expansion of free childcare hours for under 3s
- Government spent £600 million on childcare top-ups in 2025/26, some £32 million less than the previous tax year
- Complexity over eligibility and clunky systems mean tax-free childcare remains underclaimed
- Removing the £100,000 childcare cliff edge could raise £130 million by 2029/30 for the government
Charlene Young, senior pensions and savings expert at AJ Bell, comments on the latest tax-free childcare statistics from HMRC:
“While the government shelled out over £55 million in March to fund tax-free childcare top-ups, the use of tax-free childcare by families has fallen overall, including people paying less into accounts that are already open.
“The numbers show that the average family top up was £85 per month since September 2025, down from the peak of £110 per month before the first phase of the funded hours expansion in April 2024. A total of 868,095 accounts were used in the whole of 2025/26, suggesting a gap of over 400,000 families who might be missing out on tax-free childcare support, based on estimates that up to 1.3 million families are eligible.
“The fall in the use of top-ups is due in part to the expansion of free childcare hours in England – where eligible parents can now claim the equivalent of up to 30 hours per week funded term time hours for children under 5 years old. But the complex eligibility rules and system headaches for tax-free childcare, might mean many are not even getting to the stage of opening an account at all.
Source: HMRC/AJ Bell, value of tax-free childcare top-up by tax year
“Unlike funded hours, tax-free childcare is available for eligible families throughout the UK and can be put towards registered wrap around care and holiday clubs for children aged 11 and under.
“Up to £2,000 can be claimed a year per child, split into a maximum of £500 per quarter. To gain the maximum support, a parent would need to fund £2,000 a quarter, or £8,000 a year. Childcare costs are typically higher for younger, preschool children, which is why the extra funded hours will have a part to play in lower demand, saving the government £32 million in top ups to tax-free accounts in 2025/26, compared to the year before.
Source: HMRC/AJ Bell
Admin headaches and system constraints
“Although the early teething problems with payments getting to childcare providers have now been outgrown, the system remains very clunky for families to operate. You must register online for each of your eligible children to begin with and then make sure you reconfirm eligibility every three months so that you can use and receive the government top-up.
“Then there are the payments themselves. The maximum government top up works out as £2,000 a year, this is limited to £500 every three months and is not available in one go. This can present problems for people with variable earnings who don’t have the benefit of a smoother monthly salary to fund payments in.
“While you can set up regular payments to fund the accounts and pay childcare providers, childcare providers and holiday clubs charge in different ways, which might mean constantly logging in and out of accounts to make sure you’ve paid the right amounts on time. And not all providers are registered with the system, meaning you might have to change your holiday club plans at the last minute.
Eligibility issues remain
“Although tax-free childcare is available well beyond the preschool years, parents on the highest incomes are excluded completely as it is lost where a parent has an ‘adjusted net income’ over £100,000. Adjusted net income refers to all income that would be subject to tax, less certain reliefs like pension contributions. While that is good news for people who can divert extra money into their pension, it remains a barrier to signing up for an account in the first place.
“The £100,000 limit has also been frozen since 2017, while average earnings have increased by around 35% over the same period, dragging more families into being excluded. This is despite research showing that the government could remove the £100,000 childcare cliff edge completely and bring in more tax revenue than the additional childcare support would cost.
“The ‘tax-free’ label also isn’t strictly accurate. While the support comes with a welcome 25% top up from the government, higher and additional rate taxpayers pay much higher marginal rates of tax meaning their payments into the scheme are far from tax-free.
“Care is also needed for families claiming Universal Credit, as tax-free childcare cannot be claimed alongside this. Families should check they will not be worse off by stopping one claim to start another.”
Background
- Tax-free childcare lets eligible families claim up to £2,000 a year per child towards childcare costs, split into £500 per quarter.
- Support is available throughout the United Kingdom.
- For every £100 paid into a specific online account, the government will add £25.
- Children must be aged 11 or under and both parents must be working for at least 16 hours per week.
- Support is lost where one parent has an adjusted net income of £100,000 and higher financial support is available for longer for disabled children.
- See www.gov.uk/tax-free-childcare for more information.
