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August 20, 2015

Tax-free childcare scheme

2017 will see the introduction of a new government scheme aimed at helping working parents to pay for childcare. The system is designed to be more accessible and flexible, hence encouraging parents to go to work.

After the start date the new scheme will replace the existing system of employer supported child care vouchers for new applicants; however those currently benefitting from the existing vouchers will not be obliged to switch to the new scheme.

How does it work?

To begin with parents must set up an online account for each child. They will then be able to log in and top up their account. For any sum paid in (up to a limit of £10,000), the government will top up the account by 20% , this equates to maximum government contributions of £2,000 per child per year. The fund can then be used to pay for childcare through registered providers. The label “tax-free childcare” comes from the 20% government contribution, given that 20% is the rate of income tax which the majority of people pay.

Who is eligible?

The new scheme will be available to parents with children aged up to 12 (or 17 for disabled children). Both parents must be working and earning an average of at least £50 per week but no more than £150,000 each per year. Parents who are self-employed, as well as those on maternity/paternity leave will also be eligible for the scheme.

How does it compare to the existing system?

Advantages of the new scheme:

• The online aspect of the scheme will offer convenience and flexibility to modern working families, who will have the ability to log on and see their balance at the click of a finger. Anybody will be able to pay into the child’s account including grandparents or employers, offering further potential for flexibility although these payments would not attract the government top up. Parents will also have the option to pay different amounts each month in order to build up their balance in preparation for periods such as school holidays where more childcare might be required. Equally, it will be possible to withdraw money from the account if desired. It must be noted however that in this case the government would withdraw its contribution.

• The new scheme could be considered as being accessible to a significantly larger proportion of families than the current arrangement. This is because the new system does not rely on employers to offer it; parents will be able to sign up regardless of where they work. This means that parents will not feel tied to an employer purely based on childcare costs. Entitlement in terms of income could also make eligible a larger bracket of workers than previously. The old system required earnings to be above the national minimum wage, whereas the new system accepts parents who earn an average of just over £50 per week but no more than £150,000 per year. This will lead to greater flexibility for parents who may want to work part time. Accessibility to the scheme will also be increased by the inclusion of parents who are self-employed, or on maternity/paternity leave. Currently these groups are not eligible for tax free childcare vouchers.

• An important difference between the new tax-free childcare scheme and the current employer supported vouchers is that the new system calculates savings per child whereas the old scheme calculates savings per parent. As a result, the maximum saving per child under the new arrangement will be £2,000 per year whereas the maximum saving per child under the current scheme is £1,860 per year (assuming both parents are working, basic-rate tax payers, and are making the maximum level of contribution). Furthermore, for families with two working parents and multiple children, savings of up to £2,000 would be available for each child under the new system, whereas under the old system the maximum level of savings a family with two working parents could expect to make stays at £1,860 regardless of the number of children.

Drawbacks of the new scheme:

• Under the new scheme only households where both parents work will be eligible for tax-free childcare whereas the employer-supported voucher system is available to families where only one parent works. This new rule is significant as it will prevent many families from benefitting from tax-free childcare and parents could even feel pressured into going to work.

• The new tax-free childcare system will be available to parents with children up to the age of 12. This is in comparison to the current scheme which includes children up to the age of 15. This means that parents with teenage children will be paying more for childcare than they do at present.

Who will be the winners and losers?

It is evident that the new scheme will affect a larger number of families which is a major advantage. Additionally, it cannot be argued that families with multiple children and families with self-employed parents will gain much more under the new scheme. However, it is also true that families with a stay-at-home parent or families with teenage children would find themselves better off under the current scheme.

Consequently, those who are claiming under the current system should consider which scheme is more appropriate for them when the new system is brought in.

Contact us today to discuss your tax requirements.
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