Tax Free Childcare Update

In March 2014 the Government announced its plans to introduce Tax-Free Childcare, a new scheme which will enable parents to claim 20% of their childcare costs (up to a maximum of £2,000 per child). The new Tax-Free Childcare scheme will be begin to roll out in early 2017.

We have received a number of calls from parents asking for an update on the Tax-Free Childcare scheme. This article provides an update on the scheme and how it will roll out.

When will Tax Free Childcare be introduced?

The new scheme will open in early 2017. It will be phased in, allowing families with younger children to join the scheme first. It is intended that all eligible families will be able to sign up before the end of 2017.

How will Tax-Free Childcare work?

Parents register for an online childcare account through the Government website GOV.UK. HMRC will check that you are eligible to join the scheme e.g. both parents must be working.

For every £8 you pay into your account, the Government will give you £2, up to a maximum of £2,000 per year per child (i.e. you would need to put in £8,000 for the Government to top up your account with £2,000).

Parents will be able to pay into their account at any time and receive the top up. Other people, such as family, friends and employers, can also pay into the account. Payments can be made directly to the childcare provider through the online account.

Unlike Childcare Vouchers, the amount you save with Tax-Free Childcare will be dependent on your childcare costs.

What is happening now?

HMRC is currently making preparations for the scheme. All registered childcare providers will have received information about Tax-Free Childcare and will receive a further letter asking them to register to accept Tax-Free Childcare payments when the scheme is rolled out next year.

1,000 parents from across the UK will be randomly selected to take part in a trial of the new scheme. We have already heard from some local parents who have been contacted about this.

What will happen to the Childcare Voucher Scheme?

The Childcare Voucher Scheme will close to new entrants in April 2018, only parents who are using Childcare Vouchers at this time will be able to continue using the scheme. This means you have until April 2018 to decide which scheme is best for you.

Which scheme is best for me?

The savings you can make with each scheme will vary according to your family’s circumstances, and while one scheme may work best for one family, it may not be as beneficial for another.

For example: Mr and Mrs Jones pay £450 for childcare each month for their daughter. They are both Basic Rate Tax Payers and each sacrifices £225 each month on Childcare Vouchers, making a 32% of saving of £72 each. As a result, their joint annual saving is £1,728.

On the Tax-Free Childcare scheme, Mr and Mrs Jones pay £450 for childcare each month for their daughter. They only need to pay 80% of their childcare costs and therefore add £360 to their Tax-Free Childcare account each month. The Government tops the account up by £90. Annually they will then make a saving of £1,080.

In this scenario, Mr and Mrs Jones would be better off using the Childcare Voucher scheme.

Finally…Points to consider:

• Make sure you work out the savings you will make on Tax-Free Childcare before joining the scheme. The headline saving of £2,000 per child is the maximum amount available. In order to make this saving you will need to have childcare costs of £10,000 per child per year. You may be financially better off using the Childcare Voucher scheme or claiming childcare assistance through Tax Credits (or Universal Credit).
• You cannot claim Tax Credits or Universal Credit while using the Tax-Free Childcare Scheme. The legislation makes provision for the automatic termination of you and your partner’s Tax Credit or Universal Credit award once you make a valid declaration of eligibility for Tax-Free Childcare. Make sure you calculate the impact this may have before joining the new scheme.

We are here to help!

For more information or if you would like one of our specialist Family Benefits Advice Team to work out which scheme is better for your circumstances you can call on 028 9267 8200 or email hello@employersforchildcare.org.