TT262: Childcare Vouchers vs Tax Free Childcare

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New research shows that nowadays parents face bills of almost a quarter of a million pounds to raise just one child to the age of 21. Based on current prices, approximately £70,000 of the total costs will be spent on babysitting, nursery fees or childminders. So there is no surprise that parents incurring these costs appreciate any help to reduce them.

EMPLOYER CHILDCARE VOUCHERS

Should you be employed, one way to help with these ever-increasing costs is to ask your employer for childcare vouchers. Many employers choose to operate their childcare voucher scheme via ‘salary sacrifice’. This means that should you accept childcare vouchers, you do not have to pay National Insurance Contributions (NIC) or Tax on that amount sacrificed. The tax free amount will depend on when you joined the scheme.

Any employee who joined the scheme before 6 April 2011 is entitled to £55 a week in tax free childcare vouchers, regardless of the level of earnings. For those employees who joined the scheme on or after 6 April 2011 the employer would have had to carry out an assessment of the employee’s earnings to work out the exempt amount. The exempt amount is £55 per week for a basic rate taxpayer, £28 for a higher rate taxpayer and £25 for an additional rate taxpayer.

The general conditions in relation to the childcare vouchers scheme are as follows:

  • The scheme must be available to all employees;
  • The child must be a “qualifying child” – a child qualifies up to 1 September following their 15th birthday. The child must be the child or stepchild of the employee or a child for whom the employee has parental responsibility; and
  • The childcare must be registered or approved childcare only.

From April 2018, new entrants to the childcare vouchers scheme will not be permitted. Parents already in the scheme will, however, be able to remain in the scheme for as long as they require.

TAX FREE CHILDCARE SCHEME

An alternative to employer childcare vouchers is the tax free childcare scheme. This scheme was recently introduced by the Government and is mainly aimed at working parents with children aged under 12.

The scheme works whereby you open an online account (click on the following link https://childcare-support.tax.service.gov.uk/par/app/applynow) to pay for registered childcare. The government pay a “top-up” of an additional 25% of the money you pay into the account so that for every £8 you pay in, the government will add an extra £2. You can receive up to £2,000 per child per annum. If you have a disabled child, you can receive up to £4,000 per child per annum.

In order to qualify, you and any partner, must each expect to earn (on average) at least £120 per week (equal to 16 hours at the National Minimum or Living Wage). If you, or your partner, are on maternity, paternity or adoption leave, or you are unable to work because you are disabled or have caring responsibilities, you could still be eligible.

The scheme is not available for individuals where they or their partners, expect to earn £100,000 or more in a given year. A further restriction is that this scheme cannot be used at the same time as childcare vouchers, universal credit or tax credits.

Note that for the new tax free childcare scheme, the government’s contribution is withdrawn/repayable where either partner earns £100,000 or more so that, for higher earners the older vouchers scheme may be preferable. If that applies to you, you have limited time available to enter that particular type of arrangement; i.e. by 31 March 2018.

If you are uncertain, there is an HMRC childcare calculator to be found at  https://www.gov.uk/childcare-calculator which will help you determine which scheme best suits you.

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