Three great features of the new government tax-free childcare scheme

English currency pounds sterling help with childcare costs


April 2017 is the launch of the long-awaited government tax-free childcare scheme.   But what are some of the advantages to parents?

No. 1 – You can get the tax advantage whether you work for an employer or for yourself

You may be one of the lucky people currently able to access an employer-supported childcare voucher scheme, offering a way for parents to pay for some of their childcare costs out of their pre-tax income. However, not all employers are keen to administer a childcare voucher scheme, despite the potential to make savings on employer NI contributions. So, up until now, if you worked for such an employer, you missed out on the tax advantages of the vouchers. Self-employed parents were also out in the cold, unless they fancied forming a limited company in order to administer childcare vouchers to themselves…! However, the good news is that the new tax-free childcare scheme is based around an online account held by parents and your employer does not have to be involved at all.

No. 2 – You can pay in what you want and when you want, up to agreed limits

The existing employer-supported childcare voucher scheme asks you to nominate an amount of vouchers to ‘buy’ through salary sacrifice from your pre-tax and pre-NI income. The limit is £243.00 per month, so you can nominate any amount up to that monthly limit. However, if you want to vary that amount from one month to another it needs to be arranged via your employer and implemented in the next payroll. Under the new scheme, parents have direct control of what they pay in to the tax-free childcare account. You can pay in a lot one month, a little the next, as long as you stay under the overall total account limit of £10,000 per child. The ability to vary the payment amounts will be of particular benefit if your income varies a lot from month to month, or if you are on a tight budget. If you get an unexpected bill, money that you need right now won’t be locked away in the form of childcare vouchers. You can also withdraw money from the account if your situation changes.

No. 3 – Your money grows by 20%, so you are getting your basic-rate tax back again

For every 80p that is paid into the account, the government will top it up an extra 20p. The total amount that can be saved is capped at £2,000 per child, per year. So if you pay in £8,000 over the year to spend on childcare for your child, the government will give you £2,000. For disabled children the contribution will be £4,000. If you are a basic rate taxpayer you will effectively be getting a refund of the tax that you have paid on £10,000 of your earnings – now that’s what I call a rebate! Once the money is in your account you can use the topped-up amount to pay for early years provision or childcare offered by an Ofsted registered provider. That means Ofsted-registered nurseries, after-school clubs or playschemes, pre-schools, playgroups and nannies. It can also be used to pay for home care-workers working for a registered home care agency. Both you and your provider will need to register for the tax-free childcare scheme via the Childcare Choices website.

So these are three great features of the new government tax-free childcare scheme!

There are additional eligibility criteria for the new scheme, so do take a look at this page on YouGov for more details. Please note that this blog is only a guide and some parents may be better off remaining with other schemes to support parents with the cost of childcare. You should always seek advice tailored to your own circumstances before making decisions that may have financial implications.

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