Last year the Government announced a consultation on their tax-free childcare proposals designed to help working parents pay for the ever-increasing cost of childcare. This week it outlined how the new Tax-Free Childcare scheme will work.
Tax-Free Childcare is designed to benefit employees directly, helping working parents with their childcare costs, supporting them back into the workplace if they want to and helping them to increase their hours in work. Key features of the new scheme, which will be introduced in Autumn 2015 include:
- Help with childcare costs for a much wider range of working parents, including self-employed parents as well as those employees whose employers do not currently provide assistance with childcare. However the key is both parents have to be working in order for the family to qualify; in single-parent families the single parent must have a job. This is different from the current voucher scheme where help can be claimed even if only one of two parents is employed. It will be available to all parents earning up to £150,000, when the 50% tax rate kicks in, and to anyone working at least eight hours a week on the minimum wage, or earning around £50, or just over £605 a quarter. Parents will have to declare that they expect their earned income to be above the minimum level over the quarterly entitlement period.
- All eligible parents will be provided with a government top-up of 20p for every 80p they pay towards their childcare costs, up to a limit of £2,000 per child per year but there is no limit on how many children you can claim for.
- From Autumn 2015 parents will be able to buy vouchers online from a single account provider – National Savings and Investments – to pay for childcare. The scheme will work in quarterly entitlement periods – once eligible, parents will continue to be entitled to support for three months, regardless of any changes in circumstances. They can pay in a lump sum of £2,000 each quarter and get £500 from the government in one sum, or make monthly payments. A parent will have to confirm that they still qualify every 3 months.
- Unlike initial proposals, the scheme will now be rolled out to all eligible families with children aged under 12 within the first year of the scheme’s operation (rather than staggered over seven years). Eligibility will end in the first week of September following your child’s 11th birthday, unless the child is disabled, in which case they will qualify until they are 16.
- Eligible parents can use their vouchers on any Ofsted registered childcare from nurseries to after school clubs. In addition they can build up credit for use when they need it most, for example during school holidays.
- Parents who are currently using the Employer-Supported Childcare scheme will be able to choose to stay in that scheme or move to Tax-Free Childcare. It will be their choice. Employers’ workplace nurseries will not be affected. Parents will not be able to join an Employer-Supported Childcare Scheme – or move employers within the scheme – once Tax-Free Childcare is introduced in Autumn 2015.
- Families with more children will be better off than working couples with only one child. Similarly basic tax rate payers may also find it to their benefit to stick to their Employer-Supported Childcare scheme as under the current system, if both parents are basic rate taxpayers they can benefit from tax relief on up to £110 per week (£5,720 per annum) in childcare vouchers, which amounts to a maximum tax saving of £1,830. Under the new system, parents on the basic tax rate would need to spend at least £7,321 in a year on childcare to save as much.
As always there are pros and cons to every proposal but the new proposed scheme is open to far more working families than the current system and for the majority of families who have more than one child, it could provide some much welcome relief at a time when childcare costs are growing faster than wages and parents need all the support they can get.