When I commenced my training as a Chartered Accountant back in 1993 one of the first principles that I was taught was that for an item of expenditure to be allowable as a deduction when calculating the tax liability arising in relation to employment income it must be wholly exclusively and necessarily incurred in the performance of the duties of that employment.
I remember my frustration some years later when I found myself paying nursery fees out of after tax income. I have yet to meet any parent who chooses to place a six month old baby into nursery unless they are forced to do so to provide care for their child whilst at work, hence as the only reason for the payment of those fees is to enable that parent to work, the fees are incurred wholly exclusively and necessarily in the course of carrying out that employment. Even so, they cannot be deducted from gross pay before tax and national insurance is calculated!
Luckily for parents times have changed in the last fifteen years and we have seen help for working families having to pay for childcare arrive in various different guises over that time. These include working family tax credit and childcare vouchers of £55 per week, really generous when the average nursery costs £175 per week per child.
However the government has proposed a new scheme to be introduced from autumn 2015 which appears to be a little more realistic in terms of addressing the actual cost of childcare.
Still under consultation, the new scheme proposes to provide financial support equivalent to basic rate tax relief on the cost of childcare, subject to an upper limit of £2,000, so basic rate tax relief on up to £10,000 of childcare per child, per annum.
HMRC will deliver the scheme in partnership with National Savings and Investments. The scheme will be administered online with parents registering and opening an online account for each child, into which they pay money to fund the childcare. The government will contribute 20p for every 80p paid by the parent.
Initially the intention was for children up to five years of age and disabled children under 17 to be eligible from autumn 2015 with all children up to the age of 12 by the end of the first year. Recent announcements include all children up to age 12 qualifying from the start of the scheme.
Parents qualify as long as they are in paid work, are not receiving support through tax credits, universal credit or employer supported childcare and do not have income in excess of £150,000 per year, per parent.
Parents will be treated as being in paid work if they are either employees or are registered with HMRC as self-employed. In a two parent household both parents must be working to qualify.
There will be no requirement to report actual earnings routinely but HMRC will be able to check claims against employers PAYE returns, which are now made in real time and for the self-employed against self-assessment tax returns.
Lower income families claiming the childcare element of working tax credits will see an expansion of this scheme under the universal credit to cover 85% of all costs subject to a cap of £175 per week for one child and £300 per week for two or more children. The government has said that most tax credit or universal credit claimants will be better off claiming through that system rather than the new tax-free childcare system. However, if their income increases they may be better off switching to tax-free childcare. Families are able to opt out of one scheme and into the other freely with no limit on the number of times they swap.
Good news for all those hardworking parents out there.