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Tax-Free Childcare scheme is up and running

Mercia Blog Tax-free Childcare scheme

After much delay, the Tax-Free Childcare scheme has been launched by the government. The scheme will be attractive to self-employed clients and many employees who do not have the benefit of an Employer Provided Childcare scheme.

It may also be attractive to those who are currently in an Employer Provided Childcare scheme but making a decision as to what is best may be difficult for a number of parents.

New government website – Childcare Choices

The government has recently launched a website – Childcare Choices – which guides parents through the various ways help is, or will be, available.

Currently parents with a child under four or with a disability can apply through the Childcare Choices site. Parents will be able to apply for all their children at the same time, when their youngest child becomes eligible. Other parents can request to receive an email from the government as to when they are able to apply. All eligible parents will be able to join the scheme by the end of 2017.

What is Tax-Free Childcare?

Eligible parents will open an online childcare account. When a parent pays into the account, the government will pay in an extra 25%. The maximum government payments are £2,000 per child per year. This means annual childcare costs of £10,000 per child can be met by £8,000 of payments by the parents and £2,000 by the government.

How much parents pay into their Tax-Free Childcare account, and when, is up to them.

Who can qualify for Tax-Free Childcare?

Parents need to be ‘working parents’ paying for ‘registered childcare’ for children under 12 (or under 17 for disabled children). If parents are not living together, the qualifying parent depends upon with whom the child usually lives.

The main criteria for a parent (and their partner if applicable) are:

  • earns on average at least £120 a week
  • earns less than £100,000 a year
  • not receiving other support for childcare such as Child Tax Credit.

A self-employed parent can average self-employment income across the year to meet the minimum income requirement.

What’s best for employees with entitlement to remain or join an Employer Provided Childcare scheme?

It’s no surprise that the answer to this question is – it depends. A good place to start for an employee is by using the government’s Childcare Calculator.

This calculator provides an estimate of the financial support parents may be able to receive after they have answered a number of questions on their childcare costs and income. The calculator is also useful for any parent.

Voucher providers will also provide information to parents. Examples I have seen have been reasonably fair in setting out the pros and cons of the choice between the schemes. The main exception to the fairness point is the statement of how much parents need to pay for childcare to make Tax-Free Childcare a better option than Employer Supported Childcare. A figure often quoted is £9,330 as in:

if you and your partner are both basic taxpayers with one child, you would have to be spending at least £9,330 on childcare per year to receive the same amount of support

£9,330 of childcare costs under the Tax-Free Childcare scheme would mean parents would fund their childcare account with 80% with 20% being government funded. 20% of £9,330 is £1,866.

What is the maximum tax and NICs savings for an employee paying basic rate tax and receiving £55 a week in vouchers? It’s £933. Yes, but the other parent is also in an Employer Supported Childcare scheme aren’t they? Hmmm. A better statement for many parents would be to quote a figure of £4,665 as being the break point.

What about parents who cannot access Employer Supported Childcare?

Many of your clients may not have an Employer Supported Childcare scheme. The recently reissued government Impact Assessment on the Tax-Free Childcare scheme states that the central weakness of the Employer Supported Childcare scheme is that it fails to support self-employed parents and employees (over half of the population) who cannot access Employer Supported Childcare.

Employers should be thankful that they do not have to operate the Tax-Free Childcare scheme. The onus is on the parents to apply for childcare accounts. But it would be helpful for employers to point their employees in the right direction.

How can we help?

We have produced a client letter which you can send to all your business clients explaining the key points of the scheme. The letter also includes information sheets which your client can distribute to employees. To order our client letter, visit our website.

Written by Phil Williams

Phil Williams

Phil is a senior tax consultant within the Mercia team. Since qualifying Phil has spent most of his time in tax but has also been involved in many other areas. He is a popular speaker on Mercia CPD courses and a regular contributor to the Mercia tax consultancy service where his extensive knowledge and experience is well recognised.

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