Tax free childcare will soon launch

The new tax free childcare scheme was originally announced in March 2014, but early 2017 will finally see the heavily delayed start of its roll out (which is scheduled to be complete by the end of that year).  For self-employed parents, it will allow them to fund at least some of their childcare costs in a ‘tax friendly’ fashion for the first time.  Some groups of parents will find they are not eligible, most notably:

  • where their child is over the age of 12 (unless the child is disabled);
  • where they are separated or divorced (only one parent will be able to participate in such circumstances);
  • where both parents do not work at least 16 hours per week;
  • where one parent earns more than £100,000 per annum.

For other groups of parents who would qualify for both the new scheme as well as the existing childcare vouchers scheme, there will be a choice until April 2018 (at which point only those already part of an existing childcare vouchers scheme will be able to continue with that method of funding their childcare).

How does the tax free childcare scheme work?

It is a government savings account (run by National Savings & Investments) which will benefit from a 20 per cent contribution from the government on top of any money paid in (up to a maximum of £2,000 per child per annum, with a more generous contribution in the case of disabled children).

On the face of it this might sound like too good an offer to turn down (and if you are self employed there is no alternative), however a 2016 white paper published by Sodexo suggested that basic rate taxpayers are the group most likely to be better off joining a voucher scheme while they remain open to new entrants, if they can, with only 22% likely to be better off with the new savings scheme arrangement.  On the other hand, higher rate tax payers – who saw the benefits to them of the voucher scheme restricted in 2011, are more likely to be better off under the new arrangement, with Sodexo estimating that 74% are likely to benefit.  It should be noted that those higher rate taxpayers who are still part of a scheme pre-dating the 2011 changes will have retained more advantageous relief.

Earlier this year, the government published information for both parents and childcare providers (who will, as with the voucher scheme, have to register to be able to accept the vouchers).

One other significant change with the new scheme is that employers are no longer the administrators of such arrangements – previously the vouchers were offered as part of participating employers’ payrolls.  With the self-employed now able to participate it is the parents who will have to deal with such matters.

As with all tax matters, personal circumstances should always be taken into account.  The new scheme requires participants to cease claiming Child Tax Credits and in the case of the current voucher arrangement the GOV.UK website has a ‘better off calculator‘ to help parents assess if joining such an arrangement is the right thing to do in relation to their tax credits.

If you wish to discuss your options further then please contact us and we will be in touch as soon as possible.