The Government has certainly been shouting about its plans for tax free childcare. The new scheme is scheduled to be introduced in Autumn 2015, but what are the facts behind all the rhetoric?
The latest research from the Family and Childcare Trust suggests that annual fees for full time childcare for an under two year old now come in at a whopping £9,850. It is probably not a coincidence then that the total which can be saved for each child in a year will be £10,000 (including the maximum Government contribution).
How will it work?
Parents will be able to open a new childcare account with National Savings and Investments (NS&I) which they will use to save for childcare costs. You will need a separate account for each child, although you will be able to manage all of them from a single log-in. These accounts will carry no charges and the scheme will be fully digital, with the application and accounts themselves being operated online. The Government has agreed to provide ‘appropriate assistance’ to those who are unable to apply for and manage their accounts online.
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, split into quarterly limits of £500. Care should be taken to time contributions in a way that ensures maximum top ups are applied to the account.
Employers will be able to contribute to the accounts, as will other family members, in order to maximise the relief available. Any amount contributed to an employee’s childcare account on top of their salary will be subject to PAYE and Class 1 National Insurance.
Once the funds are in the account, payments will be made directly to the childcare provider. Alternatively, parents will be able to withdraw money from the account if they need to, although the 20p top ups attached to funds withdrawn will be returned to the Government and the number of free withdrawals may be limited.
Who is eligible to join?
Tax free childcare will be available to parents that live and work in the UK, members of the armed forces working overseas and those ‘temporarily absent’ from the UK. The definition of ‘working’ will include those in self employment as well as employees. Employees will continue to be classed as working when on statutory parental leave or sick leave.
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.
Lone parents must be working to claim the 20p Government top up and if you are in a couple, both of you must work. There will be a minimum income requirement for each parent, albeit just £50 a week, the equivalent of one working day on minimum wage. HMRC will check employee claims against the employer’s Real Time Information (RTI) returns, and self employed worker claims against their tax returns. To support those starting out in self employment, HMRC will waive the £50 income limit for the first four quarters.
Which children can be claimed for?
Initially the scheme will only apply to childcare for children up to five years old and disabled children up to 17. The Government plans to extend this to include all children under 12 by the end of the first year.
The age limits are set in reference to school years i.e. you can claim for children until the first week of September after their fourth, eleventh or sixteenth birthday.
What childcare can the account be used to pay for?
The childcare account can only be used by parents to pay for childcare that ‘enables them to work’. The Government has said that it will issue clear guidance on this and check compliance in a ‘proportionate’ manner.
‘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.
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:
- 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?
Below are some examples:
1. Anne and her husband are both basic rate taxpayers with two children. Only Anne has access to employer supported childcare.
2. Brian and his wife have one child. They are both basic rate taxpayers and both of their employers offer childcare vouchers.
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.
5. Edward and his wife are both higher rate taxpayers who joined their employers’ childcare voucher schemes before 6 April 2011. They have one child.