If a parent pays you through Tax-Free Childcare or the government funds some of their hours, it's natural to wonder whether that money is treated differently from a cash or bank transfer payment. It isn't, and that surprises a lot of childminders.
This guide explains exactly how funded hours and Tax-Free Childcare payments are taxed when you're self-employed as a childminder. We'll cover what counts as your income, where the trading allowance fits, and what changes when you join Making Tax Digital for Income Tax.
It's written for sole-trader childminders in England, Wales and Northern Ireland. Figures are for the 2025/26 tax year unless stated.
Is Tax-Free Childcare income taxable for a childminder?
Yes. Money you receive through Tax-Free Childcare is ordinary trading income, taxed in exactly the same way as a fee a parent pays you directly. The government top-up doesn't change that, because by the time it reaches you it's simply part of the parent's payment for your services.
The key thing to understand is whose money the government top-up is. Tax-Free Childcare works at the parent's end, not yours. For every £8 a parent pays into their childcare account, the government adds £2, up to £500 every 3 months (£2,000 a year per child), or £1,000 every 3 months (£4,000 a year) if the child is disabled.
That topped-up balance belongs to the parent. When they pay you from it, you receive a single payment for childcare. You don't separate out "the parent's £8" from "the government's £2", and there's no tax relief for you to claim on the top-up. It's all just income from your childminding business.
How does Tax-Free Childcare actually reach you?
You register as a provider so parents can pay you from their childcare account. The parent pays money in, the government adds its top-up at the same time, and the parent then sends a payment to you from the combined balance. Payments usually take a couple of working days to land.
So from your point of view, a Tax-Free Childcare payment looks like any other bank receipt. It's already been topped up before it reaches you, you can't see the split, and you record the full amount you receive as income.
In practice, the most common mistake we see is a childminder assuming the government portion is some kind of grant that sits outside the accounts. It isn't. Record the whole receipt.
Are funded hours taxable income?
Yes. Payments you get for delivering government-funded early years hours are trading income too, taxed the same as fees paid privately by a parent.
Funded early years entitlements now start from 9 months old for eligible working parents, following the September 2025 expansion. The funding is paid to you (usually via your local authority) for caring for the child, so it's income earned from your childminding business. You include it in your turnover alongside private fees and Tax-Free Childcare receipts.
A useful way to think about it: the funding scheme changes who's paying for the childcare, not what the payment is. Whether the money originates from a parent's pocket, a Tax-Free Childcare top-up, or a government funded-hours payment, it's all income from the same trade.
How do you record this income correctly?
Add it all up. Your turnover for the tax year is everything you receive for childminding, from every source combined:
| Income source | Counts as turnover? |
|---|---|
| Private fees paid directly by parents | Yes |
| Tax-Free Childcare payments (including the top-up) | Yes |
| Government funded-hours payments | Yes |
| Late-payment fees, holiday retainers, meal charges | Yes |
Record the gross amount you actually receive from each source. Don't net anything off at this stage. You deduct your allowable business expenses separately to arrive at your taxable profit, and it's that profit, not your turnover, that you're taxed on.
If your total profit, added to any other income, comes to more than the £12,570 personal allowance for 2025/26, the excess is taxed at the normal rates. You can sense-check the effect on your own figures with our self-employed tax calculator.
Where does the £1,000 trading allowance fit?
The trading allowance lets you earn up to £1,000 of gross self-employed income in a tax year without paying tax on it. It's based on your gross income before expenses, and it applies to your total trading income, which for you means private fees plus Tax-Free Childcare plus funded hours combined.
There are two ways it can help:
- If your total gross childminding income for the year is £1,000 or less, it's covered in full by the allowance and you generally don't need to report it.
- If your gross income is more than £1,000, you can choose to deduct the £1,000 allowance instead of your actual expenses. You can't do both.
For most working childminders, gross income comfortably exceeds £1,000, and claiming actual expenses gives a better result than the flat £1,000. So the allowance tends to matter most for very part-time or occasional childminding. We weigh up that exact decision in our guide to the childminder's £1,000 trading allowance choice.
What changes under Making Tax Digital from April 2026?
The way Tax-Free Childcare and funded hours are taxed isn't changing. They're trading income before and after Making Tax Digital for Income Tax (MTD for Income Tax). What's changing is how some childminders work out their expenses, and how they keep records and report.
Childminders have long had a bespoke arrangement with HMRC, set out in the Business Income Manual at BIM52751. It lets you deduct fixed percentages of your household running and fixed costs based on the hours you childmind (running costs up to 33% and fixed costs up to 10% at 40 or more hours a week), plus a 10% wear-and-tear deduction calculated as "10% of total childminding income", plus reasonable estimates for the children's food without keeping receipts.
HMRC updated that guidance on 18 March 2026. The bespoke arrangement now does not apply to childminders who are within MTD for Income Tax. HMRC's wording is that "from April 2026 this guidance does not apply to childminders within MTD", and that those childminders "should follow the rules for expenses and record-keeping that apply to all other businesses".
In plain terms, once you're inside MTD for Income Tax:
- You lose the hours-based running-cost and fixed-cost percentages and the 10% wear-and-tear deduction.
- You move to standard apportionment of household costs (working out a fair business proportion), or the generic simplified-expenses flat rates available to all self-employed people.
- You can still get relief on the business proportion of furniture and household items under the normal self-employed rules. The relief doesn't vanish, it's just calculated the standard way rather than as a flat 10% of income.
Childminders who are not yet within MTD can still use the bespoke arrangement for now.
When does MTD for Income Tax start to apply to you? It's phased in by qualifying income, which is your gross income from self-employment and property combined:
| Qualifying income | You must use MTD from | Based on the tax year |
|---|---|---|
| Over £50,000 | 6 April 2026 | 2024/25 |
| Over £30,000 | 6 April 2027 | 2025/26 |
| Over £20,000 | 6 April 2028 | 2026/27 |
Note that the threshold test uses your gross income, not your profit, so all your Tax-Free Childcare and funded-hours receipts count towards it. We cover the transition in detail in our guide to MTD for Income Tax for childminders.
Illustrative example: a childminder's mixed income
Illustrative example. Sara is a self-employed childminder. In the 2025/26 tax year she receives childminding income from three sources:
| Income source | Amount received |
|---|---|
| Private fees paid directly by parents | £14,000 |
| Tax-Free Childcare payments (top-up included) | £9,000 |
| Government funded-hours payments | £6,000 |
| Total gross income (turnover) | £29,000 |
All three sources are trading income, so Sara's turnover is £29,000. She has no other income.
Because her gross income is well above £1,000, the trading allowance won't help her, so she claims her actual allowable expenses instead. Suppose those expenses total £8,000. Her taxable profit is £29,000 minus £8,000, which is £21,000.
Her profit of £21,000 is above the £12,570 personal allowance for 2025/26, so £8,430 is taxable. At the 20% basic rate, that's £1,686 of Income Tax (£8,430 x 20%). She'd also pay Class 4 National Insurance on profit above the £12,570 lower profits limit, at 6% for 2025/26.
The point of the example is simple: the funded hours and Tax-Free Childcare money sit in turnover exactly like the private fees. There's no separate, lower-taxed pot.
Frequently asked questions
Do I pay tax on the Tax-Free Childcare government top-up?
Effectively yes, because by the time the money reaches you it's just part of the parent's payment for childcare. You receive one combined payment, record the full amount as income, and pay tax on your profit. There's no separate relief or exemption for the top-up portion.
Are government funded hours classed as a grant I can ignore?
No. Funded-hours payments are income you've earned for providing childcare, so they're part of your trading income and turnover. They are not a tax-free grant.
Does Tax-Free Childcare income count towards the MTD for Income Tax threshold?
Yes. The MTD threshold is based on your gross qualifying income from self-employment and property combined. Your Tax-Free Childcare and funded-hours receipts are part of that gross figure.
Can I use the £1,000 trading allowance against my funded-hours income?
You can use the £1,000 trading allowance against your total gross trading income, which includes funded hours and Tax-Free Childcare. But you can either deduct the £1,000 allowance or your actual expenses, not both. For most working childminders, claiming actual expenses gives a better result.
Will the way my income is taxed change under MTD?
No. Tax-Free Childcare and funded hours remain ordinary trading income before and after MTD. What changes for childminders within MTD is the expenses method (you lose the bespoke percentages and the 10% wear-and-tear deduction) and the record-keeping and reporting rules.
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Talk to an accountant who knows childminding
Funded hours, Tax-Free Childcare and the MTD changes are simple once you know the rules, but easy to get wrong if you don't. Zmartly works with childminders day to day. If you'd like your income and expenses handled correctly, especially as MTD approaches, book a free call with a Zmartly accountant.
