What Happens to Tax-Free Childcare If Made Redundant?

Being made redundant does not immediately cancel your Tax-Free Childcare, but it puts your eligibility on a countdown. The scheme requires you to expect earnings equivalent to at least 16 hours a week at the National Minimum Wage over the next three months, and once you cannot honestly declare that at your next reconfirmation, no further government top-ups will be added.¹ You keep the current quarter you were already approved for, and any money already in your childcare account stays yours to spend on childcare. A large redundancy payment can create a separate problem if it pushes your adjusted net income above £100,000 for the tax year.

Why Redundancy Breaks the Eligibility Test

Tax-Free Childcare’s income test is forward-looking. At each reconfirmation you are asked whether you expect to earn at least the equivalent of 16 hours a week at the National Minimum Wage or National Living Wage for your age group over the coming three months. Once your employment ends and you have no new job lined up, that declaration can no longer be made truthfully. Your previous salary is irrelevant to the test. Voluntary or charitable work does not count, even if you receive expenses.¹

If you have a firm job offer with a start date that falls inside the next three months, you can factor the expected income in. Keep the offer letter, because HMRC can ask for evidence.

Your Grace Period Until the Next Reconfirmation

The scheme runs on a three-month reconfirmation cycle. Every quarter you sign into your childcare account and confirm your details are still accurate.² If redundancy hits partway through a cycle you have already been approved for, you keep your eligibility for the rest of that period. Government top-ups continue at the usual rate on any deposits you make until the cycle ends.

That built-in buffer is your grace period. Depending on when redundancy lands, it could be a few days or almost the full three months. Once the reconfirmation date arrives and you cannot meet the income test, no new top-ups will be added. Check your next reconfirmation date in your childcare account as soon as you know redundancy is coming.

What Happens to Money Already in Your Account

Losing eligibility does not mean losing the funds already sitting in the account. You can keep paying your childcare provider from it using both your own deposits and any government top-ups already credited. The account stays open for two years from the end of your last valid eligibility period.³

If you do not spend the balance within those two years, the account closes and the funds are split proportionally: the top-up portion returns to HMRC, and the rest is returned to you.³ If your childcare provider refunds money to you directly rather than back into the account, the provider becomes liable for the top-up element.⁴ The practical takeaway is simple: keep paying the provider from the account rather than withdrawing the money.

When Your Partner Still Works

If you have a partner, both of you must independently meet the work and income requirements for the household to qualify.⁵ A working partner cannot carry the household. Once your reconfirmation period ends, your own lack of expected earnings disqualifies the household from further top-ups.

One exception matters here. You can stay eligible without working if your partner is working and you receive one of the following:

Incapacity Benefit
Severe Disablement Allowance
Carer’s Allowance
Limited Capability for Work Benefit
Contribution-based Employment and Support Allowance

Parents on shared parental, maternity, paternity, or adoption leave stay eligible too, as do those on sick leave or annual leave.⁶ Standard redundancy without one of those benefits means the non-working partner fails the test.

The £100,000 Trap From Redundancy Pay

A generous exit package can catch you out on a separate rule. The first £30,000 of a genuine redundancy payment is free of income tax.⁷ Anything above that threshold is taxable and adds to your other earnings for the tax year. Payment in lieu of notice and accrued holiday pay are fully taxable from the first pound, because they count as earnings rather than compensation for job loss.

If your total adjusted net income for the tax year exceeds £100,000, you lose Tax-Free Childcare eligibility.⁶ The calculation includes salary earned since April, bonuses or commissions paid before you left, and the taxable slice of your redundancy package. A parent on £80,000 who takes a £60,000 redundancy package would add £30,000 of taxable redundancy to their salary and breach the cap.

Crossing the line costs you up to £2,000 in top-ups per child for the year, or £4,000 if the child is disabled.⁸

If you are close to the threshold, voluntary pension contributions through a relief-at-source scheme or Gift Aid donations can reduce your adjusted net income. The gross value of the contribution or donation comes off. Contributions made under a net pay arrangement or salary sacrifice are already reflected in your taxable pay and do not need to be deducted again. Speak to a financial adviser before making large pension contributions purely for this reason, because annual allowance and tax relief rules apply.

Reporting the Change to HMRC

You report redundancy through your online childcare account on GOV.UK.⁹ Sign in, update your employment status, and the system adjusts eligibility for future periods. The update does not retroactively cancel the current quarter, so you are not penalised for a period you have already been approved for.

HMRC may ask for supporting evidence, especially in complex cases. Company directors, for instance, may need to provide wage slips, bank statements, or a letter from their accountant.⁵ Keep your P45 and redundancy letter available even if the portal does not explicitly ask for them. At reconfirmation, answer honestly about whether you expect to earn above the threshold over the next three months.

Getting Back on the Scheme

Once you have a new job, you can reconfirm through your existing account if it is still open, or reapply on GOV.UK if it has closed. The test looks at expected earnings over the next three months from the date of your declaration, so you need reasonable certainty your new salary will meet the minimum.¹ You can apply before your first day of work.

Self-employment offers a more generous route back in. Newly self-employed parents do not need to meet the minimum income requirement for the first 12 months from their first declaration that relies on self-employed income. That covers four reconfirmation cycles, giving you a full year to build the business before income levels matter. You cannot claim a second start-up period unless 48 months have passed since the previous one ended.¹⁰ Self-employed parents with irregular income can also average their expected earnings over the full tax year rather than sticking to the three-month window.¹

Universal Credit Childcare While You Are Out of Work

If redundancy leads you to claim Universal Credit, a different childcare support system opens up. The Universal Credit childcare element covers up to 85% of registered childcare costs, up to £1,031.88 per month for one child and £1,768.94 for two or more children.¹¹ You cannot use Universal Credit childcare support and Tax-Free Childcare at the same time for the same child, so you have to choose.

Tax-Free Childcare covers 20% of costs up to £10,000 per child per year, capped at £2,000 in top-ups. Universal Credit covers 85% up to the monthly caps above.⁸ Where the better deal sits depends on your childcare bill and how long you expect to be out of work. For most parents facing a spell of unemployment with substantial childcare costs, Universal Credit childcare provides more support during that period.