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The Tax-Free Childcare Scheme

Family_Tax Agility Accountants LondonAnnounced by the Prime Minister and Deputy Prime Minister back in March 2014, the Tax-Free Childcare Scheme finally launches this autumn, a scheme designed to help millions of working parents across the United Kingdom tackle rising childcare costs.

The Government consulted with parents, childcare providers, employers, and other interested parties before announcing the scheme. Speaking on its necessity, the Prime Minister said, “Tax free childcare is an important part of our long-term economic plan. It will help millions of hard-pressed families with their childcare costs and provide financial security for the future.

The new scheme is available to nearly two million households up and down the country for all children up to aged twelve, and children with disabilities up to aged seventeen, provided parents are in work, earning over an average of £50.00 a week (and under £150,000 per year). This low threshold makes it possible for parents working part-time jobs to also benefit.

The Tax-Free Childcare Scheme vs. Childcare Vouchers

We’ve written extensively in the past about the tax benefits of Childcare Vouchers, so it’s heartening to see that the Government aren’t making the switch to the Tax-Free Childcare Scheme mandatory.

If you’re currently receiving Childcare Vouchers from your employers you should weigh up the benefits of both (see below) and, should you choose to, you could continue to receive Childcare Vouchers instead of enrolling under the new Tax-Free Childcare Scheme.

If you’ve not been receiving Childcare Vouchers you have until the Tax-Free Childcare Scheme is introduced in the autumn to sign up and have the option to continue receiving them. Once the new scheme has been introduced you’ll no longer be able to register for Employer-Supported Childcare.

Payments

Under the new Tax-Free Childcare Scheme, for every 80p you (or somebody else) pays into your account, the Government will add an extra 20p; the equivalent (20%) of the basic tax rate; thus the scheme having ‘tax-free’ prefixed to its name. The Government will continue to add 20% up to the amount of £2,000 per year, per child, up to a total of £10,000 (five children) per year, per household.

You can add as much as you like into the scheme each month, and grandparents, other relatives, and even family friends are welcome to pay into your account should you provide them with the necessary details.

Under the Childcare Voucher scheme you sign up to your employer’s salary sacrifice voucher scheme and exchange up to £243.00 per month (for basic rate taxpayers) of your salary for childcare vouchers, with both parents being able to claim this amount at the same time. Childcare vouchers are exempt from tax and National Insurance Contributions (NICs), meaning you’re essentially receiving up to £486.00 per month in tax-free income.

Qualification

The Tax-Free Childcare Scheme will be open to double the number of parents than Employer-Supported Childcare Vouchers are, due to its low (£50.00 a week) threshold to entry. Unlike the Childcare Voucher scheme, under the Tax-Free Childcare Scheme any working family can benefit from it; you’re not reliant on your employer supporting it.

The Tax-Free Childcare Scheme is also open to self-employed parents, unlike its predecessor. The Government have even announced a ‘start-up’ period in which self-employed parents won’t need to earn the minimum income level (£50.00 a week) to qualify. Needless to say, parents on maternity, paternity, and adoption leave, and those currently receiving paid sick leave also qualify for the new scheme.

Withdraw Payments

Under the new scheme the Government have made it possible for you to withdraw money from the Tax-Free Childcare Scheme at any time should your circumstances change. They will, however, also withdraw their equivalent 20% contribution.

Choosing a Childcare Scheme

With a view to helping working parents across the country tackle the rising cost of childcare in the simplest manner possible, the Tax-Free Childcare Scheme may be just what you’ve been looking for; though you shouldn’t discount the Childcare Voucher scheme just yet.

To speak with a professional to discuss which scheme is right for your personal circumstances, contact us today on 020 7129 1199 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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