I pay myself £5,000 and take the rest in dividends. Can I claim?

Not on those figures, no. The earnings test asks whether you expect to earn at least £2,643.68 before tax over the next three months if you are 21 or over — sixteen hours a week at the National Living Wage of £12.71. HMRC's own list of income that does not count towards that minimum includes dividends, interest, property income and pensions. Your £5,000 salary is the only figure being tested, and it fails, however much the business actually pays you. The fix is a payroll change rather than a claim: raising the salary to the £12,570 personal allowance clears the test, and on typical small-company figures it costs less than owners expect.

My income is a little over £100,000. Do I get a reduced amount?

No. There is no taper and no partial claim — if you or your partner expect an adjusted net income above £100,000 for the current tax year, you get nothing from Tax-Free Childcare, and nothing from the 30 hours of Free Childcare for Working Parents either. One threshold switches off both schemes. It is a genuine cliff edge, which is why the last few thousand pounds of dividend before it can cost more than it pays. Adjusted net income is your total taxable income before allowances, less gross pension contributions and grossed-up Gift Aid, so a pension contribution is the standard way back under the line.

Is the £100,000 tested on our household or on each of us?

On each parent separately. Two parents with £99,000 each keep both childcare schemes in full. A couple where one has £101,000 and the other has £20,000 lose both entirely, despite the lower household income. That makes the split of income between you a live planning point for an owner-managed company, particularly where both of you genuinely work in the business or own shares in it. It is not something to rearrange with paperwork in March, though — share structure has to reflect the real ownership and contribution, and getting it wrong brings problems of its own. Raise it with your accountant well before the year end.

Can I use it alongside the free hours, or with childcare vouchers?

Alongside the government-funded hours, yes — Tax-Free Childcare and Free Childcare for Working Parents can run together if you qualify for both, and many parents use the account to pay for the hours beyond the free entitlement. Universal Credit and employer childcare vouchers are different: you cannot hold either at the same time as Tax-Free Childcare. If you are moving across from vouchers you must tell your employer within 90 days of applying so they stop them, and if you are on Universal Credit you should wait for a decision on the Tax-Free Childcare application before cancelling anything.

I have just gone self-employed and I am barely earning. Am I excluded?

Probably not, and this is the exception most people miss. If you started your business less than 12 months ago, the minimum earnings requirement does not apply to you at all — it does not matter how little you earn. Apply anyway. Beyond that first year, you can also use an average of what you expect to earn across the whole tax year rather than the next three months, which helps if your work is seasonal or lumpy. And if you are both employed and self-employed, you can use whichever set of earnings gets you over the line rather than having to add them together.

HMRC says sign up for Tax-Free Childcare. Two lines stop most directors.

Reacting to: Make the most of Playday with Tax-Free Childcare (gov.uk (HMRC)) →

HMRC used Playday last week to push working families towards Tax-Free Childcare, and the numbers it quoted are worth having: families on the scheme are saving an average of almost £100 a month, and the number using it for children aged eight and over has risen by more than 20% on the year. The scheme itself is straightforward — you pay £8 into a childcare account, the government adds £2, up to £500 a quarter and £2,000 a year per child, or £1,000 a quarter and £4,000 a year if the child is disabled.

Here is the thing HMRC's press release does not say, and it is the whole story if you own a limited company. For an owner-director, Tax-Free Childcare is not a childcare decision. It is a remuneration decision — and it is settled months before you ever open the account, by the way your payroll and your dividends are set up. Two lines in the eligibility rules do the damage. One stops a large number of directors qualifying at all. The other takes the money away from directors who are doing well, at the exact moment their tax rate is already at its worst.

Trap one: dividends do not count towards the earnings test

To qualify, you and your partner must each expect to earn, over the next three months, at least £2,643.68 before tax if you are 21 or over. That is £203.36 a week — sixteen hours at the National Living Wage, which rose to £12.71 an hour in April 2026. Averaged out, it is £10,574.72 a year.

Now read HMRC's list of income that does not count towards that minimum: dividends, interest, income from investing in property, income from a pension. Salary counts. Trading profit counts. Dividends do not.

So the classic owner-director set-up — a small salary, the rest as dividends — is tested only on the small salary. A director on £5,000 a year, which is exactly the 2026/27 secondary threshold and therefore the level a lot of one-person companies sit at to avoid employer's National Insurance altogether, is nowhere near £10,574.72. They take £70,000 out of the business and fail an earnings test set at sixteen hours a week.

What fixing it actually costs

Take Sam. Sole director of her company, no other employees, profits comfortably under £50,000, two children aged six and three in after-school club and nursery. She pays herself £5,000 and takes the rest in dividends. She gets nothing from Tax-Free Childcare, and — because £5,000 is below the £6,708 lower earnings limit — she is not building a qualifying year towards her state pension either.

Moving her salary to £12,570, the personal allowance, prices out like this. Employer's NI is 15% on pay above £5,000, and as the sole director and only employee she cannot claim the £10,500 Employment Allowance. Corporation tax relief is at the 19% small profits rate. She stays on basic rate dividends.

The switch from £5,000 to £12,570, priced	Amount
Extra gross salary	£7,570.00
Employer's NI on it at 15%	£1,135.50
Extra cost to the company	£8,705.50
Corporation tax relief at 19%	−£1,654.05
So dividends available fall by	£7,051.46
Net change in Sam's pre-tax income	+£518.54
Personal tax on that change (10.75%)	−£55.74
Net change in her cash	+£462.80
Tax-Free Childcare this unlocks (two children)	up to £4,000

Read that bottom section twice. The £1,135.50 of employer's NI is the number that stops people, and it is the wrong number to look at, because salary is deductible against corporation tax and dividends are not. On these figures Sam ends up about £463 a year better off in cash before childcare is mentioned at all, picks up a qualifying year for her state pension, and turns on up to £4,000 a year of Tax-Free Childcare. If her profits sat in the marginal band instead, where relief comes at 26.5p in the pound, the cash gain rises to roughly £1,046. We wrote about that band in the 26.5% corporation tax rate nobody mentions.

Two honest caveats. This assumes she has no other income soaking up her personal allowance, and that she has enough dividends for the allowance to be fully used either way. If she employs anyone else, the Employment Allowance may cover the NI entirely and the case gets stronger. If she is a higher-rate dividend payer, the arithmetic shifts again. It is a five-minute payroll calculation, not a rule of thumb — but the direction of travel is almost always the same, and almost nobody runs it.

One exception worth knowing: if you are self-employed and started your business less than 12 months ago, the minimum earnings test does not apply to you at all. New sole traders in a thin first year should still apply.

Trap two: the £100,000 cliff edge, tested on each parent

The second line is blunter. If either you or your partner expects an adjusted net income over £100,000 in the current tax year, you get nothing. Not a reduced amount — nothing. And the same £100,000 test governs Free Childcare for Working Parents, the 30 hours a week for 38 weeks available for children from nine months to four years old. One threshold, two schemes, both switched off at once.

Adjusted net income is your total taxable income before allowances, less gross pension contributions and grossed-up Gift Aid. Dividends are in it. Rental profit is in it. So is the interest on the business's deposit account if it sits in your name.

Take Ben. Owner-director, two children under 11, £12,570 of salary and enough dividends to put his adjusted net income at £104,000. That last £4,000 of dividend is taxed at the 35.75% higher dividend rate — and because his personal allowance falls by £1 for every £2 above £100,000, another £2,000 of income is dragged into tax at the same 35.75%. Tax on that top £4,000: £2,145. An effective rate of 53.6%. He keeps £1,855.

And it costs him £4,000 of Tax-Free Childcare. Ben is £2,145 worse off for having taken that dividend, before you count the 30 free hours if either child were under five. There is no taper, no apportionment, no partial claim. It is a straight cliff, and a dividend is the easiest thing in the world to walk off it with, because you choose the date.

The three levers that actually work

Do not declare it this year. A dividend is taxed in the tax year it is paid. Profit left in the company is not income. Declaring in April rather than March is the cheapest fix on this list and costs nothing but patience.
Use a pension contribution to buy back the threshold. £3,200 paid personally into a pension is grossed up to £4,000 and takes £4,000 straight off adjusted net income. On Ben's figures the further relief through his tax return — £4,000 of dividend dropping from 35.75% to 10.75%, plus £2,000 of personal allowance restored — is worth £1,715, so £4,000 in his pension costs him £1,485 net. And it puts him back under £100,000, restoring the £4,000 of childcare.
Check whose name the income is in. The test is applied to each parent separately, not to the household. Two parents on £99,000 each keep both schemes. One on £101,000 and one on £20,000 lose both. If the share register does not reflect who actually owns and runs the business, that is a conversation to have properly with your accountant — not a piece of paperwork to shuffle in March.

The asymmetry nobody tells you about

Put the two rules side by side and you get the sentence that matters: the dividend that cannot help you qualify can still disqualify you. Dividends are excluded from the minimum earnings test but fully included in the £100,000 test. They count against you at the top and not for you at the bottom. That is not an accident of drafting you can argue with — it is simply how the scheme is built, and the only sensible response is to set your salary and time your dividends knowing it.

Four things to do this week

Look up your own gross salary for this year. Not your drawings — the payroll figure. If it is below £10,574.72 and you have a child under 12, you are failing the earnings test today. Ask your accountant to price a change before the next payroll run rather than at the year end.
Forecast your adjusted net income to 5 April 2027 now. Salary, dividends already paid, dividends you intend to pay, rent, interest. If the total lands between £100,000 and £125,140 you are in the worst band in the tax system and the childcare loss sits on top of it. Our management accounts work exists to give you that number in month nine, not month fifteen.
If you already have an account, diarise the reconfirmation. You must sign in to your childcare account every three months to confirm you are still eligible. Miss it and the top-ups stop. Put four dates in the calendar today.
Check the scheme against what you already have. You cannot hold Tax-Free Childcare at the same time as Universal Credit or employer childcare vouchers, and if you switch you must tell your employer within 90 days to stop the vouchers. The government's own childcare calculator works out which support is better for you, and the application itself takes about twenty minutes.

What is still uncertain

The £100,000 threshold. It has been £100,000 since Tax-Free Childcare opened in 2017 and it is not indexed, so every year of wage and dividend growth pulls more owners over it while the real value of the £2,000 falls. Nothing has been announced to change that. The next opportunity is the Budget on 28 October 2026, the date the Chancellor confirmed to the Treasury Select Committee at the end of July — and as we said in our note on the twelve-week planning window, the date is currently the only thing that has been confirmed. Plan on the rules as they stand, because they are the rules you will be judged on for 2026/27 regardless of what is announced in October.

Where we come into this

None of this is clever planning. It is a payroll number, a forecast and a diary entry. But it only gets caught if somebody is looking at your salary, your dividends and your household in the same conversation, before the money moves — which is precisely the conversation that does not happen when the accounts are prepared nine months after the year end.

If you run a limited company and you have children under 12, ask us to run the salary comparison. It takes minutes, it is part of every accountancy package we do, and it sits alongside the wider tax planning review. Book a discovery call and bring your last payslip and your dividend vouchers.