If you run a limited company and pay yourself mainly in dividends, that efficient pay structure has a hidden cost when children come along: on paper, HMRC sees you as earning nothing — and that can shut the door on 30 hours of free childcare a week. The fix is small, cheap and easily missed.
The scheme in one paragraph
In England, working parents of children aged nine months to four years can claim 30 hours a week of government-funded childcare during term time under the Free Childcare for Working Parents scheme (Childcare Act 2006; Childcare (Free of Charge for Working Parents) (England) Regulations 2022, SI 2022/1134). Scotland, Wales and Northern Ireland run their own versions. Both parents in a couple generally need to be working and earning at least the equivalent of 16 hours a week at the National Living Wage, and neither parent can have adjusted net income above £100,000.
Why dividends fail the test
The earnings threshold only counts employment or self-employment income. Dividends, rental income and interest are ignored. So the classic owner-manager setup — a small salary (or none) topped up with dividends — can leave you failing the test even if you’re taking £100,000 a year out of your company. At the 2026/27 National Living Wage of £12.71 an hour (age 21+), the threshold works out at £203.36 a week, or £10,574.72 a year. Your friend is half right: if you’re drawing only dividends, you don’t qualify. But that’s trivially fixable.
The fix: pay yourself a qualifying salary
Take a salary from your own company of at least £10,575 a year. That clears the threshold, ticks the employment-income box, and preserves your childcare eligibility. The downside is a small amount of employer’s National Insurance: with the secondary threshold at £5,000 and the employer rate at 15% (both effective from 6 April 2025), the company pays:
(£10,575 − £5,000) × 15% = £836.25
That’s before the company gets corporation tax relief on the salary and the NI as a deductible expense, so the real cost is lower still. For 30 hours a week of childcare (which in many parts of the country would cost £8,000–£12,000 a year privately), it’s a good trade.
Couples: both have to qualify
If you live with a partner — married, civil partners or cohabiting — you both have to meet the minimum earnings test (unless the non-working partner receives a qualifying benefit such as carer’s allowance). If one of you isn’t working, the household is out.
A straightforward answer: put your partner on your company’s payroll at £10,575 a year. That qualifies them for childcare purposes and, in most owner-manager cases, unlocks a further tax-planning win.
The Employment Allowance bonus
A company with a sole director who is also the only employee cannot claim the Employment Allowance (Employment Allowance (Excluded Persons) Regulations 2016, SI 2016/344). Hiring a second employee — your partner counts — usually takes you out of that exclusion and qualifies the company for the allowance, currently up to £10,500 a year (National Insurance Contributions Act 2014, as amended). For most small owner-managed companies, that wipes out the employer’s NI bill on both salaries entirely.
A worked example
Mr Fox is the sole director of his consultancy and pays himself £12,570 a year (the personal allowance) plus dividends. Employer’s NI on his salary is (£12,570 − £5,000) × 15% = £1,135.50, with no Employment Allowance available. He then puts his spouse Mrs Fox on the payroll as a part-time bookkeeper on £12,570. With two employees, the company now qualifies for the Employment Allowance, which wipes out the combined NI bill — a £1,135.50 saving. Both parents now count as “working”, so the household unlocks 30 hours of free childcare. Two wins for one structural change.
Watch-outs
• The role must be real. HMRC will disallow a salary paid to a family member who does no actual work — both for corporation tax relief and for the childcare qualification. Give your partner a genuine remit and keep a short log of what they do.
• Stay under £100,000 adjusted net income. The cap applies to each parent individually. Bonus and dividend decisions need to factor that in during nursery years.
• Reconfirm quarterly via your Government Gateway account. Diary it — miss a reconfirmation and the funding stops.
How we can help
Getting the salary–dividend mix right gets intricate once childcare, Child Benefit, pensions and the Employment Allowance are all in the frame. We model this for owner-manager clients each spring so the year’s remuneration pulls its weight across the whole household. If your nursery start is coming up, get in touch. We’ll answer the phone.
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