As you may be aware, the Government has announced plans to launch a new Tax-free Childcare scheme in autumn 2015 which will eventually replace the existing Childcare Voucher scheme.
If you are a parent currently receiving Childcare Vouchers, you may be impacted by the changes proposed as the new Tax-Free Childcare scheme will limit access to the scheme based on income and is targeted to working families, where both parents work. One of the key changes is that the scheme will no longer be administered through Employers, enabling self-employed and lower income families to benefit going forward.
Read on for further information and to see whether this change may impact you.
What is the current Childcare Voucher scheme?
Under the current Childcare Voucher scheme, parents can exchange up to £243 of their gross salary per month for childcare vouchers. These ‘salary sacrifice’ funds are exempt from tax and NI contributions and can save a family up to £1’866 in tax per annum. The total salary sacrifice that can be converted to childcare vouchers depends on your tax band, for example parents in the basic rate tax bracket can each save up to £933 in tax a year. Both parents are eligible to enter the scheme and if they save the maximum value this equates to savings of up to £1’866 per annum.
Childcare Vouchers can then be used to pay for all forms of childcare up to the age of 16, including nannies, childminders, nurseries etc as long as the childcare provider is Ofsted registered (or the equivalent authority in Scotland, Wales or Northern Ireland), or approved under the voluntary Childcare Approval Scheme.
In order to benefit from the existing Childcare Voucher scheme, your Employer needs to provide the option of salary sacrifice via Childcare Vouchers.
For more information on the current Childcare Voucher scheme, see the HMRC website.
What is the proposed Tax-Free Childcare scheme?
There are a number of key differences to the way the new Tax-Free Childcare scheme will be managed. The scheme is scheduled to launch in autumn 2015 and in brief, the new scheme will be managed as follows:
- The Government will subsidise 20% of childcare costs (equivalent to the basic rate of tax), up to a limit of £6’000 per child per year, which equates to a saving of up to £1’200 per child per year. Once the scheme is fully up and running, it can save a typical working family with two children under 12 up to £2’400 per year.
- The new scheme will only be eligible to working families where both parents work (or one parent works in single-parent families).
- In the first year of the scheme, only children up to the age of 5, born in or after September 2010 will be eligible for childcare vouchers. This eligibility will increase to 6 in the second year, and so on until all children up to the age of 11 are included. Once the scheme is fully functioning, eligibility will end in the September following the child’s 11th birthday.
- The scheme will be available to all eligible working parents and unlike the current Childcare Voucher scheme it will not be offered via Employers.
- The funding will not be deducted from a parent’s salary, therefore those on low incomes and self-employed individuals will be eligible to use the new scheme.
- The new scheme will be run by Childcare Voucher providers, where funds will be collected from parents and from the Government in an online voucher account. Childcare providers can then be paid directly from the account with one payment.
For more information on the proposed Tax-Free Childcare scheme, see the GOV.UK website.
Please note that the Tax-Free Childcare scheme details above are not final and may change pending the outcome of the consultation in mid-October 2013; final scheme details will be communicated in due course.
Who is eligible for the new Tax-Free Childcare scheme?
The new Tax-Free Childcare scheme will be available for all working families where both parents work or one parent works in single-parent families. The scheme will initially be for parents of children under the age of five and will be open to both employed and self-employed parents.
Eligibility of children will be aligned to the school year so that children in the same year will be treated consistently and parents can receive support with their costs for the whole school year.
Parents who are on paid maternity, paternity or adoption leave will still be eligible to receive Tax-Free Childcare; and couples in which one parent works and the other receives Employment and Support Allowance or Carers’ Allowance will also be eligible for the scheme.
There are however a number of restrictions:
- Each working parent must earn less than £150’000 a year; if both parents earn £149’999, they will still be eligible.
- The scheme is not available to individuals claiming tax credits (or Universal Credits).
- Families with two parents where just one parent works will not be eligible for the scheme. There will be few exceptions to this rule, including if the non-working parent is a full time carer, disabled or in full-time education.
What does this mean for you?
What are the advantages?
- Tax-free Childcare will be accessible to more parents than the current Childcare Voucher scheme as it includes the self-employed and those on low incomes.
- Families with two or more children in childcare and single parents with one or more children in childcare will receive an increase in savings on the new scheme compared to the savings made with the current Childcare Vouchers scheme.
What are the disadvantages?
- The new Tax-free Childcare scheme requires that both parents are working, so those families where only one parent works will not be able to access the new scheme.
- Families with two working parents and only one child in childcare can currently save up to £1’866 using Childcare Vouchers. Under the new Tax-free scheme however, the maximum saving is £1’200 resulting in a potential loss of £666.
- Tax-free Childcare will not be available for families where one or both parents earn over £150’000 per annum.
- Families with children born before September 2010 will not be able to access the scheme.
What should you do now?
You still have time to maximise the savings available via the existing Childcare Voucher scheme by doing the following:
- If you are not yet using childcare vouchers and your employer offers a salary sacrifice voucher scheme, join the scheme and contribute the maximum you can afford (up to £243 per month, depending on your tax bracket).
- If you are already exchanging a minimal part of your salary for vouchers, increase the amount to the maximum value allowed according to your tax band.
By doing the above now, you could save up to £933 in tax per year or £1’866 saving per family if both parents join. You will also be able to ‘save’ any Childcare Vouchers accumulated for future use.
Note: Childcare Vouchers can be used to pay for registered childcare until your child is 16, under the current Childcare Voucher scheme. Childcare Vouchers will remain in place for a set period (yet to be agreed) after the new scheme is implemented, however they will only be available for those who joined a Childcare Voucher scheme before autumn 2015.
For more information or advise on childcare funding and schemes and how to make the most of your tax-free savings, please contact us on 020 8780 2349.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstances.