For Parents28 January 20263 min read

Tax-Free Childcare vs Halo Pay — what's the difference?

Halo Team

TL;DR: Tax-Free Childcare tops up your payments by 20%, capped at £2,000 per year. Halo saves you 28–42% with no cap. For most employed parents paying significant nursery fees, Halo saves considerably more.

Both help with childcare costs. Both are legitimate. But they work completely differently — and for most employed parents, Halo is the better deal by a wide margin.

How Tax-Free Childcare works

You open a government childcare account and pay money in. For every 80p you deposit, the government adds 20p. The maximum top-up is £500 per quarter — £2,000 per year per child.

So if your nursery fees are £1,000 a month, you'd pay £10,000 over the year and the government would add £2,000. Your total saving: £2,000.

It doesn't matter whether you earn £20,000 or £90,000. The saving is the same flat £2,000 per child, as long as you meet the eligibility criteria.

How Halo Pay works

Your employer pays your nursery fees from your salary before tax and National Insurance are deducted. You save the tax and NI you would have paid on that amount.

For a basic rate taxpayer, that's 28% (20% income tax + 8% NI). For a higher rate taxpayer, it's 42% (40% tax + 2% NI). There's no cap.

If your nursery fees are £1,000 a month and you're a basic rate taxpayer, you save £3,360 a year. If you're a higher rate taxpayer, you save over £5,000.

Side by side

Tax-Free Childcare

Saving: 20% on childcare costs
Maximum: £2,000/year per child
Who qualifies: Self-employed and employed parents earning £8,670–£100,000
How it works: Government tops up a childcare account

Halo Pay

Saving: 28–42% on nursery fees
Maximum: No cap
Who qualifies: Employed parents whose employer offers the benefit
How it works: Nursery fees paid before tax via Halo Pay

When is Tax-Free Childcare better?

There are genuine situations where TFC makes more sense.

You're self-employed. Halo Pay only works if you have an employer. TFC is available to anyone who meets the income criteria.

Your nursery fees are very low. If you're paying less than around £600 a month, the TFC top-up and the Halo Pay saving start to converge. Below £400, TFC might edge ahead.

You're already claiming Tax Credits or Universal Credit. You can't use TFC alongside tax credits, but Halo Pay can also affect your UC calculation. Worth checking your specific situation.

When is Halo better?

For the majority of employed parents paying significant nursery fees — say £800 a month or more — Halo saves considerably more than TFC. And the higher your fees or your tax rate, the wider the gap gets.

A higher-rate taxpayer with £1,200/month in nursery fees saves £2,000 with TFC or £6,048 with Halo. That's three times more.

Can I use both?

You can't use Tax-Free Childcare and Halo Pay for the same nursery fees. It's one or the other. But if you have childcare costs not covered by your Halo Pay arrangement — a childminder on top of nursery, for example — you could potentially use TFC for that portion.

The bottom line

If your employer offers Halo Pay and you're paying more than a few hundred pounds a month in nursery fees, the numbers almost always favour Halo Pay. It's not even close.