The new Tax-Free Childcare scheme started to roll out in early 2017. Here we answer some key questions on the new initiative.
What is ‘Tax-Free Childcare’?
Tax-Free Childcare is a new Government scheme designed to help parents with the cost of childcare. Under the initiative, tax relief worth 20% will be available for childcare costs up to a total of £10,000. The scheme will therefore be worth a maximum of £2,000 per child (£4,000 for a disabled child). Eligible parents will be required to open an online account, into which they can contribute money to pay for childcare. The Government will then ‘top up’ payments at a rate of 20p for every 80p that families pay into the account. The scheme will be available for children aged under 12, or up to 17 for children with disabilities.
To qualify for Tax-Free Childcare all parents in the household must:
- meet a minimum income level based on working 16 hours per week at the National Living Wage
- each earn less than £100,000 a year; and
- not already be receiving support through Tax Credits or Universal Credit.
Unlike the current system of Employer-Supported Childcare, the new Tax-Free Childcare scheme will be available to self-employed parents. To support newly self-employed parents, the Government is introducing a ‘start-up’ period. During this period a newly self-employed parent will not have to earn the minimum income level.
When is this being introduced?
The Government has confirmed that Tax-Free Childcare will be rolled out gradually ‘from early 2017’, with parents of the youngest children able to apply first. All eligible parents will be able to join the scheme by the end of 2017 if they so choose.
What about the existing scheme?
The existing Employer-Supported Childcare scheme (through which childcare vouchers are commonly provided) will remain open to new entrants until April 2018. Those parents already receiving Employer-Supported Childcare can choose to remain in the current scheme, assuming their employer still offers it, or they may switch to Tax-Free Childcare.
Will I be better off under the new scheme?
This really depends on your individual circumstances, employment status and income. Potential winners of Tax-Free Childcare include self-employed parents and working single parents with annual childcare costs in excess of around £5,000. Unlike the current scheme, Tax-Free Childcare is not reliant on employers offering the scheme.
However, some people might be better off under the existing system. As a general rule, two-parent families with one child where both work are likely to be financially better off under Employer-Supported Childcare. And remember, Tax-Free Childcare is not available to families where either parent earns in excess of £100,000, or to two-parent families where one parent does not work. Where this applies, individuals might want to consider applying for Employer-Supported Childcare before the scheme closes to new entrants in April 2018.
I am a parent – what do I need to do?
Eligible parents will need to open an online account, into which they can contribute money to pay for childcare. Anyone will be able to make contributions to the account, not just the child’s parents. Further details on online accounts are expected in due course. In the future, eligible parents will also be able to apply online for both Tax-Free Childcare and the 30 hours extended entitlement for childcare for three and four-year-olds, through a new joint digital service being developed by HMRC.
Will it affect employers?
Tax-Free Childcare is an arrangement between the Government and parents, so employers are not directly involved in the new initiative. However, with some parents likely to be better off under the existing arrangements, employers offering Employer-Supported Childcare should be prepared for any additional uptake of childcare vouchers before the scheme closes to new entrants.
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