Are You Missing Out on Free Childcare Due to Dividends
- Brian Pusser
- May 19
- 3 min read
Published 19 May 2026
If you run your own company and pay yourself mainly through dividends, you might be missing out on a valuable benefit: up to 30 hours of free childcare per week for your young children. This government scheme in England supports working parents, but it has a key requirement that many owner-managers overlook. Understanding how your income is counted could unlock thousands of pounds worth of childcare support for your family.
Let’s explore what you need to know to qualify, how your salary affects eligibility, and practical steps to make sure you don’t accidentally disqualify yourself.
How the Free Childcare Scheme Works
The Free Childcare for Working Parents scheme in England offers up to 30 hours of free childcare each week for children aged between 9 months and 4 years. This support can save families thousands of pounds annually, easing the financial burden of childcare costs.
However, the scheme has a specific eligibility rule: only income from employment or self-employment counts towards the earnings threshold. This means dividends, rental income, interest, and other non-employment income sources are ignored when assessing eligibility.
For many company directors who use the common strategy of paying themselves a low salary and taking most income as dividends, this rule can be a barrier. Even if your total income is high, if your salary falls below the minimum threshold, you won’t qualify for the free childcare hours.
What Income Do You Need to Qualify?
To be eligible, each parent must earn at least the equivalent of 16 hours per week at the National Minimum Wage. For adults over 21, this breaks down to:
£195.36 per week
£10,159 per year
This means a salary of just over £10,000 annually is enough to unlock the scheme. It’s important to note that this salary must come from employment or self-employment, not dividends.
For example, if you pay yourself a salary of £9,000 and take £30,000 in dividends, you won’t meet the earnings requirement. But increasing your salary to £11,000 and reducing dividends accordingly could make you eligible.
What About National Insurance Contributions?
You might worry that increasing your salary will lead to high National Insurance (NI) costs for your company. While there is an employer’s NI charge, it is often less than expected.
For a salary of around £10,159, the employer’s NI contribution is approximately £773.85 per year. This amount is also deductible for Corporation Tax purposes, which reduces the net cost to your company.
Considering the value of 30 hours of free childcare every week, this is a relatively small price to pay. The savings on childcare fees can easily outweigh the additional NI expense.
Both Parents Must Meet the Earnings Requirement
If you live with a partner, both of you need to meet the minimum earnings threshold to qualify for the free childcare hours. This applies whether you are married or not.
If your partner is not currently working or earning enough, one option is to employ them in your company. Paying your partner a salary of at least £10,159 per year can help both of you qualify.
However, HMRC requires that the employed partner has a genuine role in the business. This role could include tasks such as:
Chasing unpaid invoices
Bookkeeping and administrative duties
Managing correspondence
Without a real job function, HMRC may challenge the salary payments, and you could lose the Corporation Tax deduction.
Practical Steps to Take Now
To make sure you are not missing out on free childcare, follow this checklist:
Review your current salary
Check if your salary is above £10,159 per year.
Talk to your accountant
Discuss adjusting your salary to meet the minimum earnings threshold while balancing dividends and tax efficiency.
Consider employing your partner
If applicable, explore giving your partner a genuine role in the business with a salary that helps both qualify.
Keep clear records
Document the work your partner does to support the salary payments and defend against any HMRC queries.
Plan ahead
Align your salary and dividend strategy with childcare needs to maximize benefits.
Why This Matters for Owner-Managers
Many owner-managers focus on tax efficiency by paying themselves a low salary and taking dividends. While this strategy reduces National Insurance and income tax, it can unintentionally block access to government benefits like free childcare.
By adjusting your salary slightly, you can unlock significant childcare savings. This change can improve your family’s financial situation without drastically increasing your tax bill.
Free childcare support is a valuable resource for working parents. If you rely mostly on dividends, you could be missing out. A small salary adjustment and proper planning can open the door to 30 hours of free childcare every week, saving you thousands of pounds.
