The new Tax-Free Childcare system
The government's new Tax-Free Childcare initiative is being rolled out from 28 April, and is expected to be fully implemented by the end of the year. Here, we review the rules surrounding the new measure.
Getting to know the scheme
Tax-Free Childcare is designed to help parents with the cost of childcare. Under the initiative, tax relief worth 20% will be available for use against the costs of childcare, up to a total of £10,000. The Tax-Free Childcare scheme will therefore be worth up to £2,000 per child (£4,000 for a disabled child). The scheme applies to children aged under 12, or up to 17 for those with disabilities.
Online accounts can be created by eligible parents, into which they can contribute money to pay for childcare. Payments will be 'topped up' by the government at a rate of 20p for every 80p that families pay in. Anyone will be able to make payments into these accounts, not just the child's parents.
Who is eligible?
To be eligible for Tax-Free Childcare, all parents in a 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.
The new scheme is also available to self-employed parents. The government is introducing a 'start-up' period, to support newly self-employed parents. During this period, a newly self-employed parent will not be required to earn the minimum income level.
Parents of the youngest children will be able to apply for the Tax-Free Childcare scheme first. If they so choose, all parents of eligible children will be able to join the scheme by the end of this year.
What if I am in the existing Employer-Supported Childcare scheme?
The existing Employer-Supported Childcare scheme will remain open to new entrants until April 2018. Those who already benefit from this scheme can choose to remain in this system, assuming their employer continues to offer it. Alternatively, they can opt to switch to the new Tax-Free Childcare scheme.
Tax-Free Childcare: who are the 'winners' and who are the 'losers'?
Potential winners of Tax-Free Childcare include self-employed parents and working single parents with annual childcare costs in excess of £5,000.
Others, however, may be better off under the old system. Two-parent families with one child where both work are more likely to be better off under Employer-Supported Childcare. It is also important to note that the new Tax-Free Childcare scheme 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.
Does the new childcare scheme affect employers?
Tax-Free Childcare is an arrangement between the government and parents. As a result, employers may not be directly affected. However, with some parents likely to be better off under the existing Employer-Supported Childcare scheme, employers offering this should be prepared for any additional uptake of childcare vouchers before the scheme closes to new entrants.
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