What is tax-free childcare?
The Government’s tax-free childcare incentive was launched in 2017, replacing the ‘Employer-Supported Childcare’ voucher scheme, which closed to new entrants from 5 October 2018.
The new scheme operates like a bank account, into which money can be deposited by anyone. For every £8 paid in, the Government will top up the account with £2, provided this is used to pay approved childcare providers.
Up to £8,000 per year per child under 12 can be put into the account, generating up to £2,000 each from the Government. For disabled children, this amount is doubled and applies up to age 17.
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 minimum wage or living wage (or getting parental leave, sick leave or annual holiday). Those who are self-employed must be able to prove they generate an income of this amount unless they started their business less than 12 months before.
Tax-free childcare is not available to anyone who is claiming tax credits or universal credits, or if either parent’s taxable income exceeds £100,000 a year.
What has it replaced?
Tax-free childcare has replaced the old childcare voucher scheme. This was provided by employers and is still open to people who remain in the scheme.
With childcare vouchers, each basic rate taxpayer parent using salary-sacrifice can allocate£55 a week, say £238 each month, of their salary on childcare using vouchers, which represents a saving of £914 a year. Those paying tax at 40% or 45% have a lower allowance if they joined the scheme after 5 April 2011.
You can remain in the voucher scheme as long as you began before 5 October 2018, stay with the same employer (and the employer continues to run the scheme) and you don’t take an unpaid career break of more than 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.
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.