Figures relate to tax year 2025-26 (UK) · 2025 (US)
Nursery fees in Britain are brutal and the government helps in three separate ways. Most parents use at least one of them.
For your British friends that is the end of the matter. The money arrives, the bill shrinks, nobody fills in a form.
An American parent has a little more to think about. Tax free childcare in particular runs through an account held in your name, and accounts are something your American return asks about.
Key takeaways
- Three separate British schemes help with nursery costs.
- Tax free childcare runs through an account in your name.
- That account counts towards your foreign reporting threshold.
- Free hours are a service rather than money, so nothing reports.
- Legacy vouchers reduce British pay but not American pay.
- The American care credit needs earned income on the return.
- A high earner loses the top up without careful planning.
What is tax free childcare?
Tax free childcare is a government top up scheme where you pay into a dedicated account and the state adds a quarter. For 2025-26 that means £2 added for every £8 you deposit, capped at £500 each quarter per child. The provider is then paid from that account.
According to GOV.UK guidance on childcare costs, the annual cap works out at £2,000 per child.
Disabled children attract double that amount.
Why does the account matter?
Because it is a genuine account held in your name at a financial institution, not a notional credit. American foreign account reporting looks at every such account you hold or can operate. A tax free childcare account counts alongside your current account and savings.
Balances are usually small, often a few hundred pounds.
They still push your aggregate total upwards, which is what the threshold measures.
A worked example
Take an illustrative example. An American mother in Reading holds a current account averaging £3,000 and savings of £6,500.
Neither would trouble the threshold on its own. She also runs two childcare accounts, one per child, each peaking at £900.
Her combined highest balances cross $10,000 for 2025. All four accounts now need reporting, not just the big ones.
Without the childcare accounts she would have filed nothing at all.
The three schemes compared
| Scheme | What you get | US consequence |
|---|---|---|
| Top up account | £2 for every £8 paid in | A reportable foreign account |
| Free hours | Funded nursery hours | Nothing to report |
| Legacy vouchers | Salary sacrifice | Still taxable US salary |
| Workplace nursery | An on site place | Usually a taxable benefit |
| Universal credit element | Costs reimbursed | A state benefit question |
| Grandparent help | Informal care | Nothing at all |
Is the top up itself taxable?
In practice it behaves as a subsidy towards a service rather than cash in your hand. The money can only pay a registered provider and never reaches your pocket. Most practitioners therefore treat it as a government benefit rather than income.
Our guide to UK state benefits on a US return covers the wider pattern.
The account holding it is the part that definitely reports.
What about the free hours?
Nothing happens on your American return at all, because you receive a service rather than money. The nursery is paid directly by the local authority and no account exists in your name. That makes the free hours the cleanest form of help available to you.
Entitlement expanded considerably for younger children through 2024 and 2025.
Take every hour you qualify for before paying into the top up account.
Do legacy vouchers still work?
They closed to new entrants in 2018, though existing users can continue while they stay with the same employer. The sacrifice reduces your British taxable pay. America gives no matching relief, so the full salary stays on your return.
Our guide to salary sacrifice for US citizens explains why.
You cannot hold vouchers and the top up account at the same time.
Can you claim the American care credit?
Only where earned income appears on the return, which the foreign earned income exclusion removes. Excluding all your salary therefore blocks the credit entirely. Switching to the foreign tax credit method keeps the income visible and the credit available.
Our guide to the child tax credit from abroad runs the same comparison.
Model both methods before assuming the exclusion is best.
What does the credit actually require?
Care expenses for a qualifying child, earned income, and details of the provider. A British nursery has no American taxpayer number, which the form accommodates through a specific notation. Keep invoices showing the provider's name and address.
Expenses covered by the top up are not your expenses for this purpose.
Only the portion you actually paid counts.
What happens if you earn over £100,000?
Tax free childcare closes to you entirely once either parent expects adjusted net income above that figure. Losing it costs up to £2,000 per child a year. A pension contribution reducing your adjusted net income can preserve eligibility.
That same contribution also helps with the personal allowance taper.
Our guide to bonus payments and US tax covers the arithmetic.
Does a bonus push you over the limit?
Easily, and the consequence is immediate rather than gradual. Eligibility is tested by expectation for the coming quarter, so a bonus year can remove the help altogether. Sacrificing the bonus into a pension often keeps you inside.
Check before each quarterly reconfirmation rather than annually.
Parents lose this by accident more than any other way.
Does a non-American spouse change things?
For the British side no, because eligibility looks at both parents regardless of nationality. For the American side it can help considerably. An account held solely by a non-American spouse falls outside your reporting entirely.
The account has to genuinely be theirs rather than nominally so.
Many couples open it in the British parent's name for exactly this reason.
Do the accounts need reporting every year?
For every year they existed and the threshold was crossed, using the highest balance each one reached. Closing an account midway through a year removes nothing for that year. The following year drops away once it is shut.
Download the statements before closing, because access ends with the account.
Our guide to FBAR signature authority covers how far the rules reach.
What about a workplace nursery?
An employer provided place is exempt from British tax where the conditions are met, which is a genuinely valuable benefit. America has a limited exclusion for employer care assistance that rarely fits a British arrangement. The value usually lands as taxable compensation.
Our guide to benefits in kind and US tax covers valuation.
Ask the employer what figure they would put on the place.
Does any of this affect the child credit?
Not directly, since childcare help and the child credit answer different questions. What links them is the choice between exclusion and credit methods, which affects both at once. Choosing badly can cost you a refundable amount and the care credit together.
For 2025 the refundable child credit reaches $1,700 per qualifying child.
That figure alone often decides the method.
What if your child is also American?
Nothing changes for the schemes themselves, which are British and look only at residence. It matters later for savings held in the child's name. A junior account for an American child raises questions the childcare account does not.
Our guide to the junior ISA and US child tax covers that side.
Check the child's status early, because it shapes several later decisions.
Does the account earn interest?
A small amount, paid on the balance you hold while waiting to pay a provider. That interest is ordinary foreign savings income on your American return. The sums are usually trivial, though they belong on the return like any other interest.
Our guide to UK savings interest and US tax covers the treatment.
Request an annual statement rather than adding up the quarterly ones.
What if you move abroad mid-year?
Eligibility ends when you stop living in Britain, and the account has to be closed. Any balance comes back to you, which is simply your own money returned. The top up portion is reclaimed by the government.
Report the account for the part of the year it existed.
Take a final statement before the account disappears from view.
Can grandparents pay into it?
Anybody can deposit, which is a useful feature where grandparents help with fees. The top up still applies to whatever goes in, up to the quarterly cap. The account remains yours regardless of who funded it.
That matters for reporting, since ownership rather than source decides it.
A large contribution from an American grandparent is a separate gift question.
Does childminder or nanny care qualify?
Registered childminders and nannies both qualify, which widens the scheme considerably beyond nurseries. The provider has to sign up to receive payments from the account. Unregistered or family care does not qualify at all.
Check registration before committing to a provider.
The American credit has its own requirements, which are broader.
What records should you keep?
Keep quarterly statements for each childcare account, nursery invoices showing what you personally paid, and a note of the highest balance each account reached in the year. Those three items cover both the reporting and any credit claim.
Keep them for six years like any other account record.
Download before closing an account, since online access disappears.
How to handle the schemes
- Claim every free hour you qualify for first.
- Decide which parent should hold the top up account.
- Record the highest balance each account reaches annually.
- Add those balances to your foreign account total.
- Keep nursery invoices showing your own payments.
- Model the exclusion against the credit before filing.
- Watch adjusted net income against the £100,000 limit.
- Reconfirm eligibility each quarter, especially in a bonus year.
Mistakes and penalties we see with tax free childcare
The first is forgetting the account exists. It is a foreign account like any other.
The second is assuming the British saving carries across. Vouchers reduce British pay only.
The third is excluding all income and then trying to claim the care credit, which cannot work.
The fourth is losing eligibility to a bonus without checking the quarterly reconfirmation.
How US UK Tax Accountants helps
We add childcare accounts to the reporting list, because they are the single most forgotten account type among parents. Then we check whether the family crosses the threshold at all.
Before filing we model the exclusion against the credit, since that choice drives the care credit and the refundable child credit together. Our US federal returns service covers the filings.
If you have a child starting nursery, get in touch before opening anything.
Last reviewed 17 October 2026. This article is general information and not personal tax advice. Family circumstances vary, so take advice on your own.
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Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
