The Treasury has recently issued an update addressing the complexities within the tax system related to childcare support, acknowledging that some families face a “higher marginal tax rate” due to current rules.
Many families across the UK can benefit from help with childcare costs, whether through free entitlement or tax-free childcare schemes. However, eligibility depends on specific criteria, and not everyone qualifies for support.
One such scheme is Tax-Free Childcare, which allows eligible parents to open a childcare account. For every £8 paid in, the government adds an extra £2, up to a maximum top-up of £500 every three months (£2,000 annually) per child. This amount increases to £1,000 every three months (£4,000 annually) for children with disabilities. Parents can use funds from this account to pay their childcare provider directly. Full eligibility details are available on the official government website.
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Additionally, parents in England may qualify for 30 hours of free childcare weekly through the Free Childcare for Working Parents scheme. To be eligible, children must be aged between nine months and four years. More information about this scheme can also be found on the government website.
Recent discussions have focused on how the personal tax allowance interacts with these childcare benefits, especially for those earning over £100,000. The personal allowance-the amount of income on which you pay no tax-is currently £12,570. However, this allowance decreases by £1 for every £2 of income above £100,000, being fully withdrawn at an income level of £125,140 or more.
As a result, individuals and couples with adjusted net incomes exceeding £100,000 are not eligible for tax-free childcare or free childcare entitlements. This tapering of the personal allowance creates a higher marginal tax rate on income within this band, which the Treasury acknowledges.
Emma Reynolds, Chief Secretary to the Treasury, explained: “Within the personal tax system, withdrawal of the Personal Allowance affects those with income over £100,000 a year. This was introduced in 2010/11 and occurs gradually, with £1 of allowance lost for every £2 of income above the income limit. We recognise that this creates a higher marginal tax rate and introduces complexity, but removing it would be costly and regressive.”
She further highlighted the government’s commitment to supporting families with childcare costs, noting that the system targets parents for whom childcare expenses most impact their ability to work. In the Autumn Budget 2025, it was announced that the Department for Education will conduct a review aimed at simplifying childcare provision for both families and providers.
Alongside this, the Competition and Markets Authority (CMA) is conducting a market study into early years education and childcare services across England. This investigation will assess whether the sector serves families, providers and the wider economy effectively, examining services from birth through the start of school.
Parents interested in determining their eligibility for free or tax-free childcare are encouraged to consult the relevant government web pages, which provide comprehensive guidance on available support and qualifying criteria.
For detailed information on the personal allowance and its tapering mechanism, the official government website offers dedicated resources.