Tax free childcare is a new HMRC scheme that offers working families in the UK support toward childcare costs.
What is it?
HMRC will top up every payment of 80p with an extra 20p up to the equivalent of £2,000 per tax year, per child – so up to £500 every three months. This increases to £4,000 for children who are registered disabled.
It’s available for children up to the age of 12 (up to the age of 17 for children with disabilities).
Who is eligible?
Unlike the current childcare vouchers scheme (see below) Tax free childcare will be available to both employed and self-employed individuals.
In a couple both must work and they must each earn more than £120 per week on average. The income limits will just need to be met over a 3 month period if the individuals are self-employed.
Newly self-employed parents will not be required to earn the minimum income level for the first 12 months. A new ‘start up’ period will be available every 5 years.
If one parent earns more than £100,000 per year they will not be eligible.
If one parent is on paid or unpaid Statutory Maternity Pay, Statutory Paternity Pay or Statutory Adoption Pay they will still qualify although you can only claim Taxfree childcare for the newborn in the last 14 days of leave.
When can I sign up?
If you have a child under 4 (or a disabled child under 17) on 31 August 2017 you can register for the scheme now.
Older children will be eligible by the end of 2017 and you can register now to be notified when they are eligible.
Once you have a child that is eligible you can sign up your other children at the same time.
How does it work in practice?
You will need to set up a government gateway account with HMRC.
You and others can then start to pay into the account and the Government will pay in their contribution.
The money can be used to pay for childcare at any time as long as the provider has registered with the scheme.
You can withdraw the money at any time but you will lose the Government incentive.
The account holder will need to confirm their eligibility every 3 months and HMRC have said that they will notify the account holder 4 weeks in advance of this.
When can’t I use the scheme?
Even if you meet the criteria mentioned earlier you will not be eligible for the scheme if you are currently claiming universal credits, tax credits or claim childcare vouchers (see below).
Are there any alternatives?
For a number of years employees have been able to use childcare vouchers which allow them to pay for childcare from their pre tax salary which means that they do not need to pay tax and NI on their childcare costs. This represents a saving of 32% for basic rate taxpayers, 42% for higher rate taxpayers and 45% for additional rate taxpayers.
They are only available if the employer offers them.
Childcare vouchers are restricted to £55 per week (up to £930 per year tax saving), per parent if a basic rate tax payer, £28 per week (up to £624 per year tax saving) if a higher rate tax payer and £25 per week (up to £590 tax saving per year) if an additional rate tax payer.
They are available for children up to the age of 15 years (16 if the child is disabled).
There is no minimum or maximum earnings thresholds and only one parent needs to work.
No new entrants will be allowed into the childcare voucher scheme from April 2018. Employees can still join the scheme before this date and can remain in the scheme until they leave their job or the employer closes the scheme.
Childcare tax credits
You could also be eligible for Childcare Tax Credits worth approximately £3,000 per year but both parents need to work more than 16 hours per week and each household must have income under £46,000 per annum.
Parents of children in England are currently entitled to 15 hours free childcare for children aged 3-4 years.
This could increase to 30 hours from September 2017 as long as certain conditions are met:
- In a couple both must work
- They need to work the equivalent of 16 hours per week and earn more than £120 per week
- No parent can earn more than £100,000 per annum
I am eligible for both childcare vouchers and Tax Free Childcare s0 which is best for me?
Generally, Tax Free Childcare is better if you have more children. You can get £2,000 per child under the Tax Free Childcare Scheme. Childcare vouchers are restricted to a set amount per parent regardless of the number of children you have.
If your childcare costs are high you are also better off with the Tax free childcare. You can get up to £2,000 per child from the Government under the Tax Free Childcare Scheme. The tax saving on Childcare Vouchers is restricted to £930 per parent (if a basic rate tax payer) which is based on maximum childcare vouchers of £55 per week.
Tax Free Childcare is only available for children under 12 whereas the Childcare Vouchers are available up to 15.
Links – HMRC have a website which can tell you more about the schemes available HMRC Childcare Choices