Parents in the UK can register for the Government's new Tax-Free Childcare scheme from today (22 March 2017). Here’s a guide explaining how the new scheme works.
Sections
What is Tax-Free Childcare?
Tax-Free Childcare is a new Government initiative which is replacing the existing Employer-Supported Childcare voucher scheme.
Eligible working families will be able to get a 20% top-up from the Government on childcare costs up to £8,000 (£16,000 for disabled children) per child up to the age of 12 (or 17 if disabled) per year.
The extra money will be available to around 1.8 million households to help with the cost of childcare.
How will it work?
A parent or carer will be able to set up an online Childcare Account with HM Revenue & Customs (HMRC) for their child or children.
For every 80p paid into a Childcare Account, the Government will contribute 20p, up to £2,000 per year per child under 12 (£4,000 for disabled children up to the age of 17).
The scheme will intially focus on parents with youngest children - aged two or under - before being rolled out nationally by the end of the year.
Parents and carers, as well as other family members and employers, can pay into the account and money can then be paid directly to Ofsted-registered childcare providers when needed.
It’s hoped the accounts will make it easier to administer payments and offer better flexibility.
For example, payments in can vary and allow parents or carers to build up credit for when they need it most, such as during school holidays.
If circumstances change or you no longer want to pay into the account, you’ll be able to withdraw the money you have built up. But if you do, the Government will take back its corresponding contribution.
Who is eligible?
To be eligible for Tax-Free Childcare, you will need to:
- Have a child or children under 12 (or a disabled child or children under 17);
- Be working - this means both of you if you're in a couple;
- Both adults must earn a minimum of £115 a week and less than £100,000 a year;
- Not be claiming tax credits (this includes the childcare element of Working Tax Credit) or Universal Credit.
However, it can be used alongside 15-hour childcare as well as 30-hour free childcare, which will be introduced in September 2017.
The new scheme will be open to single parents and couples who work eight or more hours a week. Crucially both parents in a couple need to be in work to qualify for the scheme. Families where one parent stays at home and doesn’t work will not be eligible. However, parents who temporarily aren't working, such as those on maternity, paternity or adoption leave will still be eligible.
The scheme will also be open to parents and carers who are self-employed and will include a ‘start-up’ period where those starting a new business don’t have to earn the minimum income level to qualify. Parents who are on paid sick leave as well as those on paid or unpaid statutory maternity paternity and adoption leave will be eligible.
Parents will need to log in quarterly to confirm eligibility via a simple online questionnaire. If something changes and you are no longer eligible, saved up credit will be available for two years to use with the Government’s contribution still applied.
How does the new scheme compare?
Tax-Free Childcare will replace Employer-Supported Childcare, which uses a system of vouchers to help those that qualify with childcare costs.
The Employer Supported Childcare scheme allows working parents who earn above National Minimum Wage to claim vouchers for kids up to the age of 15 (16 if disabled) to pay for Ofsted-registered childcare each month through salary sacrifice via their employer.
The vouchers are worth up to £243 a month and can be bought by each parent from their salary before tax and any National Insurance Contributions (NICs) are taken. For a basic rate taxpayer this can mean an annual saving of £933 or £1,866 if two parents can access the scheme.
Here’s a rundown of how the schemes compare.
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Employer-Supported Childcare |
Tax-Free Childcare |
|
|
Maximum saving per year |
Each working parent can save up to £933 per year. So the maximum saving is £1,866 per year for parents who both work. |
Parents will be able to save up to £2,000 per child, per year (£4,000 for disabled children). |
|
Parent eligibility |
Parents must be earning above the national minimum wage. |
Parents must be earning above an average of £115 a week but under £100,000 a year. |
|
Is it available to the self-employed? |
No, Employer-Supported Childcare vouchers are taken through PAYE salary deductions. |
Yes, Tax-Free Childcare will be available to the self-employed through a new HMRC online platform. |
|
How long can I claim for my children? |
Employer-Supported Childcare vouchers are available to use for children up to the age of 15 or 16 for disabled children |
Tax-Free Childcare will be available for children up to the age of 12 or 17 for disabled children. |
|
Can both parents claim if separated or divorced? |
Yes, the saving is per parent, so both households can claim childcare vouchers. |
No, the account is per child, so only one household can claim. |
|
Can I use Child Tax Credits? |
You are allowed to take both Employer-Supported Childcare vouchers and Child Tax Credits, but you should use the Government’s ‘Better off Calculator‘ to ensure that this is the best option. |
You will have to opt out of Child Tax Credits to take advantage of Tax-Free Childcare, which could result in a significant loss of £545 a year. |
|
Must both parents be working? |
No, whether your partner works has no effect on you claiming Childcare Vouchers through your employer. |
Yes. Tax-Free Childcare is for households where all parents are working; both parents if they live together, a single parent, or the biological parent of the child and their partner (if they live with the child). |
| Availability | No longer available. | Launches on 28 April, but you can start applying now. |
Employer-Supported Childcare is reliant on an employer offering the scheme, is not open to self-employed people and the savings are capped per parent rather than per child. In contrast the Tax-Free Childcare is not reliant on employers offering the scheme, is open to self-employed workers and top ups are capped per child rather than per parent.
Which scheme is best for me?
In general Tax-Free Childcare benefits those that earn less than £100,000 as well as self-employed workers, those starting their own business and people on maternity, paternity or adoption leave. It’s also beneficial for parents with more than one child.
Employer-Supported Childcare was beneficial in cases where one parent doesn’t work, but the other does and can access the scheme through their employer, those who earn more than £100,000 and people that only have one child.
What should I do now?
The Tax-Free Childcare scheme launches on 28 April but you can apply now through the Government's Childcare Choices website.
You won't be able to join an Employer-Supported Childcare scheme once Tax-Free Childcare is introduced.
But those already registered by this date will be able to continue using it for as long as the employer runs the scheme, or as long as you stay with your employer.
More help with childcare costs
For more ideas on how to cope with childcare costs, read How to cut the cost of childcare.
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