There is a new kid on the block when it comes to reducing childcare costs, and it’s called “tax-free childcare”. Unlike childcare vouchers – which we focused on in last week’s blog – tax-free childcare can be claimed by all parents in work, including sole-traders and partnership members.
Tax-free childcare was advertised as becoming available from autumn 2015. The curious absence of a precise date has just been explained: the government has recently announced that the launch date is now postponed to early 2017. Exchequer Secretary to the Treasury Damian Hinds is quoted saying this delay is due to legal challenges from the Childcare Voucher Providers Association (CVPA), who objected to the Revenue’s agreement with National Savings and Investments (NS&I). The Revenue has an arrangement with NS&I to be the sole operator of the childcare accounts, and since the tax-free childcare system will eventually replace childcare vouchers, current childcare voucher operators will be rendered redundant.
The supreme court unanimously dismissed the CVPA’s case, but a court order has prevented the Revenue progressing the tax-free childcare arrangements until the legal action could be resolved.
This postponement has come as a huge blow to both the self-employed who are prohibited from using the childcare voucher scheme, and to those who would fare better under the new tax-free childcare scheme.
In the remainder of this blog, we’ll have a look at the new legislation to see what choice parents will come in 2017.
How does tax-free childcare work?
To receive tax-free childcare, claimants must first apply to HM Revenue and Customs to open a childcare account. A separate account is needed for each child. Payments can then be made into the childcare account either by the account-holder or another person, such as a family member or employer. The government then adds a further 25% of the contributions up to a maximum top-up of £2,000 (or £4,000 for a disabled child). If, for example, £80 is paid into the account, the government will add £20.
The precise administrative process will be revealed closer to the launch date.
Am I eligible to claim tax-free childcare?
To claim successfully for tax-free childcare, both parents or the parent in a single-parent household must be working. This a key difference with the childcare voucher scheme, which permits one parent only to be working.
Additionally, applicants for tax-free childcare must earn less than £150,000 each per annum. The parent(s) must be not be benefiting from other government-backed childcare support or childcare vouchers, tax credits or Universal Credits. Claimants must also have parental responsibility of the children – so you cannot open an account for a relative or friend – and the children must be in registered childcare, which covers Ofsted registered childcare including after-school clubs.
Due to the confusing and complex nature of the various options available to parents, it is our hope that the government will provide some on-line calculators to enable parents to gauge the financial impact of applying for tax-free childcare. A calculator for the effect of childcare vouchers on tax credits is available at https://www.gov.uk/childcare-vouchers-better-off-calculator