Tax-free Childcare topped up working families' spending on childcare by £241 million across UK last year, with thousands more signing up to the scheme.
But HM Revenue and Customs believes around one million eligible households are not making use of the scheme – while industry bosses blame the current funding system for being too complex.
In North Lincolnshire HMRC data shows 875 parents used the scheme to help with the cost of childcare in 2020-21, up from 725 the previous year.
Families get £2 for every £8 they put into an account set up for childcare spending – up to £2,000 per child per year, or £4,000 for a child with a disability.
It is available for children who are aged 11 and under, or 16 and under if they have a disability.
Yet while more families in North Lincolnshire are benefitting from the subsidy, a comparison with population estimates suggests many are not.
The used accounts were for 1,045 children in 2020-21, but the latest population estimates from the Office for National Statistics show there are 23,758 children aged 11 or under in the area.
However, not all children qualify for tax-free childcare.
Applying parents must be in work and earning at least the equivalent of the national minimum wage for 16 hours per week – currently £142.56 for those aged 23 or over, but less for younger workers.
They are also ineligible if they claim Universal Credit, tax credits, or certain other benefits, or if one of them earns more than £100,000 a year.
Across the UK accounts were used for 461,705 children in 2020-21 – up from 396,365 the year before.
The Early Years Alliance welcomed the increase in uptake but said it was still "significantly lower than projected", and money not spent should be reinvested into childcare.
Neil Leitch, chief executive, said: "It beggars belief that the Government continues to refuse to reinvest money back into the early years sector at a time when it knows full well that many providers are struggling to stay afloat."
The National Day Nurseries Association (NDNA) also said the Government must do more to encourage more parents to sign up, adding the current childcare funding system is too complex for parents and providers.
Jonathan Broadbery, director of policy and communication, said: "We want to see a single online account for families which brings together all childcare support to ensure funding to support a child’s early learning follows that child."
Figures show that the number of early years providers in North Lincolnshire rose to 152 in August 2020, from 148 the previous year.
Across England, that figure fell from 61,162 in 2019 to 58,569 in 2020.
The NDNA said the number of closures nationally was worrying for both the sector and families who depended on them in order to return to the workplace.
The Department for Education said it has spent more than £3.5 billion on early education entitlements over the past three years, and that the hourly funding rates given to local authorities to pay for free childcare places is being increased.
A spokesperson added: "This will pay for a rate increase that is higher than the costs nurseries may have faced from the increase to the national living wage this month."