Tax free childcare
Current Issues | Tax | 15th December 2016
A new tax-free childcare scheme is being introduced next year, which is designed to help parents save money on their childcare bills.
What is tax-free childcare?
The Government’s new tax-free childcare incentive will finally be launched in early 2017. Parents of the youngest children will enter the scheme first and it will be open to all eligible parents by the end of 2017. The existing ‘Employer-Supported Childcare’ voucher scheme, will close to new entrants from April 2018.
The new scheme operates like a bank account, into which money can be deposited by anyone. For every £1 paid in, the Government will top up the account with 25 pence, provided this is used to pay registered childcare providers.
Up to £8,000 per year per child can be put into the account, generating up to £2,000 more from the Government, for children under 12. For disabled children, this amount is doubled and applies up to age 17.
What is in place currently?
At the moment, parents can opt into a childcare voucher scheme but only if they are provided by their employers. With childcare vouchers, each basic rate taxpayer parent can spend £243 each month on childcare using vouchers, which represents a saving of £930 a year.
How is tax-free childcare different?
Tax-free childcare offers parents the opportunity to save money each year per child, whereas childcare vouchers offer tax-free savings on childcare each year per parent.
Under the new scheme, parents must open an online account that they can pay into to cover the cost of childcare. Employers run childcare voucher schemes and parents are able to opt into a work-run scheme.
In order to benefit from the new system, both parents must be employed for at least 16 hours a week and be paid at least the national living wage – those who are self-employed must be able to prove they generate an income of this amount. It is not available to anyone who is claiming tax credits or to any families where either parent earns more than £100,000 per year.
Who will benefit from the changes?
The new scheme will help the self-employed because they are ineligible for childcare vouchers and employees whose workplaces don’t offer a voucher scheme.
If you are spending a lot of money on childcare for more than one child it’s likely that tax-free childcare would be the better option as it offers £2,000 tax-free per child each year, rather than allocating childcare vouchers between your children.
Under the voucher scheme, the maximum amount a basic rate taxpayer can receive each year is £2,916. You would need to earn £4,208 gross salary to pay a £2,916 childcare bill out of your net income, which means that individual parents can save up to £1,372 each year, rather than allocating childcare vouchers between your children.
Who will lose out?
Families who have only one working parent will not be eligible for tax-free childcare, whereas they are currently able to claim vouchers.
Parents who are separated or divorced may find the new system more difficult. Currently, parents have their own childcare voucher allowance, but the new arrangement works on a per child basis and so parents will need to co-ordinate with each other.
What do I need to do if I’m a parent?
The childcare voucher scheme will close to new entrants in 2018. At this time, if you are already using vouchers, you will be able to choose the best option for your family – whether to switch to tax-free childcare or stay with vouchers.
What do I need to think about if I’m an employer?
At this stage employers don’t have any obligations under the new tax-free childcare initiative. Some parents will be better off continuing with the childcare vouchers, so it’s important to keep any existing scheme open for as long as your employees want to remain in it.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.