Tax-free Childcare 2017 Style
You could be better off ...
The Government has recently provided details of the Tax-Free Childcare scheme. Note that this is intended to replace the existing system under which employers can provide some tax-free childcare ...
The Government's new Tax-Free Childcare scheme replaces the existing system
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The 2017 scheme will be attractive to self-employed parents as well as to employees who do not have the benefit of an employer-provided childcare scheme.
"If you are already in an employer-provided childcare scheme, then making a decision as to what is best may be difficult for some parents!"
The government has provided information on a new website called Childcare Choices, which is intended to guide parents through the various ways in which help is, or will be, available.
Currently, only parents with a child under four (or with a disability) can apply through the Childcare Choices website, although parents will be able to apply for all their children when their youngest child becomes eligible. Other parents will be eligible to use the system by the end of 2017.
Eligible parents will open an online childcare account. When a parent pays into the account, the government will pay in an extra 25%. The maximum government payments are £2,000 per child per year.
This means annual childcare costs of £10,000 per child can be met by £8,000 of payments by the parents and £2,000 by the government.
The principal difference between the old scheme and the new one is who pays. Under the employer-provided childcare scheme, the employer pays up to £243 per month tax free, which equates to £2,916 per annum. Under the new scheme, the government will pay a proportion of the childcare costs. effectively giving you a tax refund to top up your childcare fund.
Of course, as a parent, you have to qualify and have the money available to pay for childcare, instead of having your employer pay some of it for you. The old scheme cost the government up to £1,319 in lost tax, the new system up to £2,000, so from that point of view it is a better deal for you as a parent.
As I said previously, parents will have to pay into an online childcare account. How much you pay in, and when, is up to you. But you can only pay in up to the £8,000 limit set by the government.
In order to qualify, parents need to be ‘working parents’ paying for ‘registered childcare’ for children under 12 (or under 17 for disabled children). If parents are not living together, the qualifying parent is the one with whom the child usually lives.
The main criteria for a parent (and their partner if applicable) are:
earns on average at least £120 a week
earns less than £100,000 a year
does not receive other support for childcare such as Child Tax Credit
Usefully, a self-employed parent can average self-employment income across the year to meet the minimum income requirement.
Working out which scheme is best is potentially tricky as it depends on your specific circumstances. If both parents are working, and in receipt of childcare vouchers under the existing scheme, then that is likely to be better for you than the new one.
The best advice I can give you is to have a go with the calculators that are on the Childcare Choices website and see what your circumstances achieve for you. As a rule of thumb, if your childcare costs more than £9,330 a year then you will end up better off in the new scheme. If both parents receive vouchers, this number halves to £4,665 per annum.
One big change to note is that the old 'employer-provided tax-free childcare scheme' is not available after April 2017 so it is only parents who are already in the old scheme that have this choice.
"Would you like to know more?"
If you're self-employed or run your own employer-provided childcare scheme for your employees then do give me a call on 0333 335 0422 or click here to send me an email enquiry and let's see how I can help you.
Until next time ...
I've been an accountant in and for business since 1987 and have a wide experience of consultancy, audit, accounts, taxation and wealth planning work from individuals and small businesses to multinational corporations and charities.
My eclectic interests in growing and developing business span a number of areas … and can be summarised as strategic business advice and tax saving advice.
I have worked with the Chamber of Commerce to deliver courses for people about starting up in business and have lectured about tax for a major accountancy practice and for Milton Keynes College.
I relax by reading fiction and by getting away from the office in a campervan.