If you have children, or are planning on having them anytime soon, then you need to be aware of the way the current childcare scheme works, and the changes that are happening soon, so that you can make an informed decision on what action to take. This week’s blog aims to help you in that decision by summarising the changes and what they may mean to you…..
The “old” scheme
The current childcare voucher system allows tax relief on vouchers up to £55 a week for basic rate taxpayers, £28 a week for higher rate taxpayers or £25 a week for additional rate taxpayers. This means a couple earning within the basic rate band could expect to save up to £1,830 in tax and NI, as additional income of £5,720 is tax and NI free thanks to salary sacrifice. Parents can continue to claim up until their child turns 15.
If you have your own limited company the £55 a week, or £243 per month if you prefer, can simply be paid directly from the limited company bank account to the childcare voucher provider, or to the childcare provider themselves. This is often a great way to withdraw money from the company tax free, especially if there are two employees.
The current scheme will cease to be available from April 2018, and a new scheme is being phased in from early 2017.
(worth noting that prior to April 2011 everyone was entitled to the full £55 a week regardless of income, and may still be able to claim that amount if they have remained part of the same scheme).
What’s changing?
The childcare voucher scheme is to be replaced by the Tax Free Childcare (TFC) initiative, allowing parents to claim until their children are 12 years of age (or 17 if the child is disabled).
You will need to open an online account for each of your children, and each time you pay in 80p the Government will pay in 20p. You can pay in up £8,000 per child, which would qualify for the maximum allowance of £2,000, giving a balance of £10,000. The money saved will be paid out in vouchers to Ofsted Registered Childcare providers, so as before you still cannot pay a family member or friend.
You can withdraw the money from the account at any time, although obviously the Government subsidy will disappear at that point too.
Employers need have no involvement in the new scheme, although they may be nice enough to take deductions from your net salary and pay them into a scheme if you ask them nicely (but there seems little point in this, it’s simple enough to do it yourself).
Each child can only have one online account so if the parents have separated they will need to agree on who opens the account. If they cannot agree, HMRC will decide!
Who can claim?
Anyone earning above ‘minimum wage x 16 hours a week’ and under £100,000 a year, there are no restrictions regardless of what tax band you are in within that band. There has understandably been some controversy surrounding this as it means a couple earning £199,999 will be entitled to Government funded childcare.
Both parents need to be working in order to be eligible, unless the non-working partner is in receipt of Carer’s Allowance or ESA. If the parent is single, they have to be working.
The new scheme is open to the self-employed, and those on maternity leave provided they qualified before they started leave.
How does the new scheme interact with other benefits?
You cannot open a TFC account whilst in receipt of Tax Credits, Universal Credit or the old childcare vouchers. Child benefit is not affected.
Confirming you qualify
You will need to confirm your eligibility for the new scheme every 3 months, a move that the Government think will cut down on the need for ineligible parents to repay overpayments at a later date. You will have separate accounts for each child you have, but the reconfirmation dates will be aligned.
Think this doesn’t sound as good as the current voucher system?
You may be right.
Under the new scheme if you only incur childcare costs of £5,000 then you’ll only receive £1,000 in support, less than you’d get in vouchers as a basic rate taxpayer, and indeed it’s not until you spend the full £10,000 that you’d be slightly better off.
The new scheme is however clearly beneficial to those with more than one child who have significant childcare costs, with estimates stating that a single parent with two children will be able to claim £3,067 more and a family with three children will be able to claim £5,375 more.
The new scheme is also open to self-employed people, which wasn’t the case with vouchers.
What if you’re already part of the old voucher scheme?
If you’re already part of a voucher scheme then you can continue as you are until your child reaches 15 provided you stay with the same employer, which is highly beneficial when compared to the new scheme that stops when your child turns 12. This is also good for those who own their own company and have children around that age, as provided they keep their company open they can continue claiming longer.
What should you do?
Consider your circumstances before the old voucher scheme is withdrawn in April 2018. It might be beneficial for you to join a voucher scheme now so that you’ll be able to use it later. Remember that you can join a scheme as soon as your child is born, you don’t need to wait until you’re actually incurring childcare costs.
When making your decision you should also bear in mind that the voucher scheme often works on a salary sacrifice basis. If you’re an employee and there’s the chance that salary sacrifice would reduce your salary from above £50,000 to below £50,000 then there are Child Benefit implications to think about too.
If you’re not sure what to do then talk to your accountant and ask for their advice. You can also read more on dedicated TFC websites such as here
Please note that this blog is intended as an overall introduction to the subject matter, and should not be taken to be exhaustive or specific advice. You should discuss your individual personal circumstances with your own professional adviser before taking any action.