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Tax-Free Childcare: where are we now?

The government’s new Tax-Free Childcare (TFC) scheme is now open to all eligible families. The scheme is intended to replace Employer-Supported Childcare (ESC). This was due to be closed to new entrants from April 2018, but the deadline has been temporarily extended.

Under the original plans, from April this year ESC was set to be closed to new joiners, with parents already in an existing ESC scheme being able to choose to remain in that scheme or switch to the new TFC scheme. However, the deadline for new entrants to ESC has subsequently been extended for an additional six months to support the transition between the two initiatives.

Employer-Supported Childcare

Many employers already provide childcare support to their employees, often by supplying childcare vouchers via salary sacrifice: for example, the employee gives up pay, which is subject to tax and national insurance contributions (NICs), in return for childcare vouchers. This may save tax and NICs for the employee, and NICs for the employer.

Such arrangements can be attractive, although care needs to be taken when implementing a scheme to ensure that it is set up correctly. Also, for those on low rates of pay, such arrangements may not be appropriate.

The new Tax-Free Childcare system

The TFC scheme was first introduced in April 2017 and has been rolled out in a series of stages. On 14 February 2018, the scheme opened to all remaining eligible families. The new scheme allows both employed and self-employed parents in the UK access to tax-free childcare. This is unlike the existing ESC system, which is available only to employees. Funds may be used for a range of regulated childcare, including nurseries, nannies, childminders, breakfast and after school clubs and holiday clubs.

How does Tax-Free Childcare work?

Eligible parents can open an online childcare account. When a parent pays into the account, the government will pay in an extra 25%. So if £80 is paid into the account, the government will automatically add £20. The maximum government top-up is £500 every three months, and a total of £2,000 per child per year. This means annual childcare costs of £10,000 per child can be met via £8,000 of payments by the parents and £2,000 by the government. Anything above £10,000 for the year will have to be paid by the parents.

For disabled children, the maximum top-up payment available is £4,000 a year per child.

Who qualifies for the Tax-Free Childcare scheme?

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.

Eligibility

  • Both parents must be working (or one parent, if a single parent family); certain exceptions apply
  • Parents must earn a minimum of 16 hours a week at the National Minimum Wage or the National Living Wage (in 2018/19 this would be £125.28 per week for someone over 25), and less than £100,000 a year. For the newly self-employed, however, the minimum earning limit does not apply for the first 12 months
  • Parents must not be in receipt of alternative forms of financial help with childcare, such as childcare vouchers, Tax Credits or Universal Credit
  • Parents must open an online account and validate their eligibility every three months.

Applications can be made online through the Childcare Choices website: www.childcarechoices.gov.uk.

Tax-Free Childcare Registered Providers

Childcare providers must be registered with an official regulator and with the TFC scheme.

For those employing a nanny, care must be taken to ensure the nanny is registered with the Ofsted Childcare Register in order to accept payments. Individuals can use their childcare account to pay their nanny’s PAYE and national insurance to HMRC.

There have been some initial technical problems with accessing the new system, for which compensation may be available. Further details are available on the government website: www.gov.uk/government/publications/childcare-service-compensation.

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