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Tax Free Child Care

If you pay for childcare using childcare vouchers it saves many parents £1,000s a year in tax. These vouchers - available via a special Government scheme and operated through employers - allow you to pay for childcare from PRE-TAX salary.
 
It might not sound much, but the impact can be significant. If you're not taking advantage, check them out urgently, as the current scheme is due to change. The new one will be open to millions more people, but some families will be better off on the current scheme so it's vital you seek advice now.

The scheme was due to change in the Autumn of 2015. However, following a challenge and ruling in favour of the new scheme in the Supreme Court last month this will now be delayed until April 2017.

Childcare vouchers can save many parents with children aged up to 15 over £1,000 a year on childcare. Frustratingly, they're only available via employers, but many large and small companies take part.

If you're a director/shareholder of your own company and have children under the age of 15 you should consider registering as an employer to allow “employees” to claim the vouchers. As a director you are also an employee of your company and as such this provides another way of extracting remuneration from the company alongside basic salary and dividends. This will be essential with the change in the way dividends are due to be taxed from April 2016.

When the new Tax-Free Childcare, commences, no new entrants will be able to join the childcare vouchers scheme. If you're already a member, though, you will be able to continue for as long as your employer runs the scheme, or as long as you stay with your employer. Having registered will allow the flexibility to choose the scheme that best suits your personal circumstances.

The new scheme: what is Tax-Free Childcare?

Under the new scheme, eligible families will get 20% of their annual childcare costs paid for by the Government. The way it works is that for every 80p you pay into a newly-created Childcare Account, the Government will contribute 20p. This could mean up to £2,000 per child (the scheme assumes a maximum of £10,000 per year childcare costs per child. If you pay more, you won't get more help). The new scheme will be open to single parents/couples who work eight or more hours a week, including self-employed, and who pay for Ofsted-registered childcare for a child under the age of 12, or under 17 if the child is disabled. It will also be open to ALL qualifying parents, unlike childcare vouchers which can only be bought by people whose employer offers the scheme. Unfortunately, you can't enrol just yet.

To be eligible for Tax-Free Childcare, you will need to: 
  •  Have one or more child aged under 12 
  •  Be working - this means both of you if you're in a couple 
  •  Earn between £2,420 to £150,000 a year. This applies to both of you if you're in a couple  (so if one earns more than £150,000, then as a couple, you can't access Tax-Free Childcare) 
  • Not be claiming tax credits (this includes the childcare element of    Working Tax Credit) or universal credit
Tax-Free Childcare wins for:
  • Self-employed people or couples who earn less than £150,000, as they're eligible for Tax-Free Childcare, but can't get childcare vouchers. 
  • Parents with more than one child and high childcare costs, as the help available goes up with the number of children. There's a limit for childcare vouchers which isn't dependent on the number of children. 

Childcare vouchers win for:
  • Couples where one parent doesn't work, as they're not eligible for Tax-Free Childcare, but the employed parent is eligible for vouchers (provided their employer offers a scheme).
  • Basic-rate taxpayer parents with total childcare costs of £9,336 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare. 
  • Higher-rate taxpayer parents with total childcare costs of £6,252 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare.
  • Additional-rate taxpayers, as anyone earning £150,000+ isn't eligible for the scheme, whereas additional-rate taxpayers can get childcare vouchers.

To discuss how you can benefit from registering for childcare vouchers and for advice on how to set up a scheme please contact [email protected] or your usual Moore partner.