After it was revealed that £7.5 billion of Universal Credit goes unclaimed from the Department for Work and Pensions (DWP) each year, a similar scandal has now come to light. Around 800,000 families are losing out on vital financial support through the government’s Tax-Free Childcare scheme. This little-known benefit could ease the strain of soaring childcare costs, yet its convoluted name and insufficient visibility prevent many eligible families from claiming.
Tax-Free Childcare: much like the DWP, it’s going unclaimed
During an episode of his ITV show on 20 May 2025, Martin Lewis drew attention to this unnoticed benefit that could provide parents with an annual boost of up to £2,000 for childcare expenses.
With summer holidays approaching and childcare costs rising sharply, the question arises: why are so many families oblivious to such a significant financial lifeline? The answer may lie in the scheme’s misleading branding and opaque rules, which, as Lewis has articulated, is the leading cause of this “awareness gap.”
The Tax-Free Childcare scheme allows qualifying working parents to receive a government top-up of 25% on their childcare costs, amounting to up to £500 every three months for each child—£1,000 for disabled children—culminating in £2,000 per child annually.
However, the eligibility criteria indicate that parents must earn at least £850 a month, yet not exceed £100,000 each, leading to the conclusion that high earning parents may inadvertently find themselves at risk of being excluded from this much-needed support. They cannot claim means-tested benefits from the DWP, either.
The system leaves a staggering £1.6 billion unclaimed each year, as only 500,000 of the 1.3 million eligible households are currently enrolled, highlighting a striking failure in government communication and outreach efforts.
A new campaign
Lewis’s frustrations have resonated with many, propelling a campaign to rename the scheme “Working Families Childcare Top-Up,” a title he believes would better encapsulate its purpose and attract more applicants.
Growing voices on social media have echoed his calls, urging families to check their eligibility and potentially recover what could be significant savings for their household budgets. The inequity of such a flawed system becomes even more pronounced when considering that many parents could miss out on around £1,600 annually—an amount that can mean a world of difference in today’s financial landscape.
In conjunction with the Tax-Free Childcare scheme, the government is expected to expand free childcare hours from September 2025 for working parents with children aged nine months to two years—all while the potential for additional support through DWP Universal Credit exists.
HMRC and the DWP: missing the mark again
Families on DWP Universal Credit can reclaim up to 85% of their childcare costs, yet this payment method operates in arrears, further complicating the financial landscape for parents. Thus, choosing between Tax-Free Childcare and Universal Credit should be done with careful consideration, preferably guided by expert advice.
Moreover, the ongoing economic pressure exacerbates the urgency for clarity and understanding of these schemes.
With average yearly childcare costs now hovering around £7,200, combining available benefits could provide substantial savings for families struggling to navigate their financial obligations. Parents are encouraged to act quickly—setting up online accounts and verifying provider eligibility can ensure they don’t miss out on any potential relief before the peak summer months arrive.
