The Government has proposed a new tax-free childcare system to commence in the autumn of 2015. Tax savings will be up to £2,000 per annum per child.
How will it work?
Parents will be able to open a new childcare account which they will use to save for childcare costs.
Once the account is set up, parents can make contributions as and when they are able, and for every 80p paid in the Government will add 20p, up to an annual limit of £2,000 for every child.
To take advantage of the full £2,000 of tax savings per child, parents need to have £10,000 of childcare costs per child per year (if parents contribute £8,000 the Government will add £2,000 resulting in £10,000 available to pay for childcare).
Who is eligible to join?
Tax free childcare will be available to parents that live and work in the UK. The definition of ‘working’ will include those in self-employment as well as employees. If a couple, both must be in work. There will be a minimum income requirement for each parent, albeit just £52 a week, the equivalent of one working day on minimum wage.
Tax free childcare will not be available to families where one or both parents are additional rate taxpayers (taxable income over £150,000), whilst those claiming tax credits or universal credit will also be excluded. Those who continue in the existing childcare voucher scheme will also be ineligible.
Which children can be claimed for?
Initially the scheme will apply to childcare for children up to 12 years old and disabled children up to 16 that normally live with you.
What childcare can the account be used to pay for?
‘Qualifying childcare’ is, broadly, childcare supplied by an Ofsted registered provider and specifically excludes childcare provided by a relative of the child in the child’s own home, even if that relative is Ofsted registered.
What are the main differences between the existing and new schemes?
| Schemes Compared |
| | Childcare Vouchers | Tax Free Childcare |
Max yearly saving - basic rate
taxpayer | £933 (per parent) | £2,000 (per child) |
Max yearly saving - higher rate taxpayer
(joined after 6 April 2011) | £623 (per parent) | £2,000 (per child) |
Max yearly saving - additional rate taxpayer (joined after 6 April 2011) | £620 (per parents) | £0 (not eligible if either parent earns over £150,000) |
Necessary for employer to run scheme? | Yes | No |
Available if self-employed? | No | Yes |
Both parents must work? | No | Yes |
| Maximum child age | 15 (16 if disabled) | 5 initially, rising to 12 within the first year (16 if disabled) |
Eligible if claim tax credits? | Yes | No |
The following examples show how a family’s particular circumstances will affect whether they are better off under one scheme or the other:
1) Anne and her husband are both working basic rate taxpayers with two children. Only Anne has access to employer supported childcare. Their annual childcare costs are in excess of £10,000 per child.
2) Mary and her husband have one child. They are both basic rate taxpayers and both of their employers offer childcare vouchers. Their annual childcare costs are £6,000.
3) Connor is a lone parent and additional rate taxpayer who joined his employer’s childcare voucher scheme after 6 April 2011.
4) Diane is a lone parent and higher rate taxpayer with three children. Her employer does not offer childcare vouchers. Her annual childcare costs are in excess of £10,000 per child.
5) Edward and his wife are both higher rate taxpayers who joined their employer’s childcare voucher schemes before 6 April 2011. They have one child and their annual childcare costs are in excess of £10,000.
| Tax Saving Available |
| | Childcare Vouchers | Tax Free Childcare |
| Anne | £933 | £4,000 |
| Mary | £1,866 | £1,200 |
| Connor | £620 | N/A |
| Diane | N/A | £6,000 |
| Edward | £2,450 | £2,000 |
Will I be better off using childcare vouchers or the new tax free childcare scheme?
The answer is; it depends. There are many factors that will determine which scheme is best for you including:
- How many children do you have?
- Did you join an employer’s childcare voucher scheme before 6 April 2011, when the restrictions for higher and additional rate taxpayers were introduced?
- Do both you and your spouse or partner have access to childcare vouchers from your employers?
- Are both you and your spouse working?
- How much do you spend on childcare? Don’t forget that the government has announced a planned increase to the number of hours of free childcare provided to 3 and 4 year olds from September 2016 and therefore your childcare costs may decrease.
Parents and employers will be able to sign up to the old childcare voucher scheme until Autumn 2015. Employees already in the existing voucher scheme when the new arrangements come into force will be able to remain in the existing scheme. Although, in some cases parents may wish to swap to the new scheme as savings could be higher. If you currently pay for childcare or intend to start paying for it soon, don’t hesitate to get in touch with a member of the team if you need further assistance in working out which scheme will be best for your family.