Self-employed parents
Self-employed parents can get Tax-Free Childcare on the same terms as employed parents, but the earnings tests work differently, because self-employed income is rarely smooth. HMRC gives self-employed parents three concessions that employed parents do not need: a start-up grace period, averaging over the tax year, and the ability to choose which income counts when you have more than one source. Used properly, these concessions mean that a lumpy income is not a bar to the scheme.
The 12-month start-up grace period
If you started your business less than 12 months ago, it does not matter how little you earn. You can still be eligible for Tax-Free Childcare, even if your earnings in the next three months are below the minimum threshold. The grace period exists because new businesses often earn little or nothing at first, and the scheme does not want to exclude parents in exactly the period when childcare is hardest to afford. The grace period is time-limited: once your business is 12 months old, the normal minimum earnings test applies, so use the first year to build the income that will carry you past it.
Averaging over the tax year
If you are self-employed and do not expect to earn enough in the next three months, you can use an average of what you expect to earn over the current tax year instead. The same averaging is available to employed parents with irregular pay. The GOV.UK example is a parent aged 21 or over with no regular income who earns £10,574.72 in the year: averaged out, that is £2,643.68 every three months, which meets the minimum. In practice, this means a freelancer with a quiet quarter followed by a busy one is judged on the year, not on the quiet quarter alone — provided the year's total genuinely reaches the threshold.
Multiple jobs, and mixed employment
If you have more than one job, you can use your total earnings to work out whether you meet the threshold, including earnings from any employment and any self-employment. If you are both employed and self-employed, you can use just your self-employed income if that would make you eligible — for example, if your average self-employed earnings over the tax year are higher than what you would earn over the next three months as an employee. The rule is generous by design: HMRC lets you use the measure that reflects your real working pattern, rather than forcing you onto the measure that fails.
Income that does not count
Some kinds of income will not count towards the minimum amount you must earn. These include dividends, interest, income from investing in property, and income from a pension. The distinction matters most for company directors and landlords: a director who takes most of their income as dividends may have a large total income but little or no earnings that count towards the minimum. If you are a company director, HMRC will try to check your minimum income from your PAYE records; if you do not submit regular PAYE information, you may need to provide wage slips, bank statements, a statement from your accountant, or copies of invoices. If you are not paid regularly, annual wage slips, year-end payroll, or a letter from your tax agent confirming your salary has been paid and taxed may be needed — at the first application and at every reconfirmation.
What you need when you apply
Self-employed parents need their Unique Taxpayer Reference, in addition to the National Insurance numbers and children's details that every applicant needs. Keep your records tidy: invoices, bank statements, and your tax return are the evidence HMRC will ask for if your income is questioned, and they are also the evidence that makes reconfirmation straightforward. If your income falls below the threshold in a later period, your entitlement for that period can stop — another reason to reconfirm honestly and promptly, rather than letting an out-of-date picture carry forward.
Sources: GOV.UK, Tax-Free Childcare (if you are self-employed, minimum income requirements, and frequently asked questions); Childcare Payments Act 2014.