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Tax-Free Childcare

New Government scheme gives you up to £2,000 per child

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Sam and Helen S | Edited by Sam D

Updated May 2017

Tax-Free Childcare is a new scheme which gives eligible families up to £2,000 free per child towards childcare costs. Designed to eventually replace the Childcare Vouchers scheme, it's now open for the youngest children, and will be rolled out over the year for the rest.

Here we explain what the new scheme is, how it works, and whether you should stick with the existing offer or opt for the new one.

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Tax-Free Childcare explained: The seven need-to-knows

Tax-Free Childcare is a Government-backed scheme which helps parents with the cost of childcare. The scheme, which launched in April this year, gives eligible families an extra 20% towards childcare costs but not everybody will be able to take advantage straightaway. Here's what you need to know so far...

First grab 15 hours' free childcare (soon to be 30 hours) and check if you're due tax credits

Before you start applying, make sure you get the benefits you're entitled to:

  • Free childcare for three and four-year-olds. Every parent in England is entitled to 15 hours' free nursery provision – your provider fills in local authority paperwork with you – across 38 weeks a year, but from Sep this doubles to 30 hours (in England).

    However, to be eligible for the additional 15 hours you need to work the equivalent of 16 hours/week at National Minimum and Living Wage (currently £120/week; while both in a couple must work) and no one parent can earn £100,000+/year. See full info (including for the rest of the UK).

  • Are you eligible for childcare tax credits, typically worth £3,000/year? If you pay for childcare, work 16+ hours a week (couples must both work) and have a sub-£46,000 family income you could be entitled.

    There's no guarantee but it'll be worth checking to see if you are. Full help in Childcare Tax Credits. If you get them, they're usually a winner ahead of what's below. 

    Warning: It's important to note, you won't be able to get the childcare tax credit – or childcare element of working tax credit to give it its full name – or universal credit if you're signed up to the new Tax-Free Childcare scheme.

Get up to £2,000 per child per year to cover annual childcare costs of up to £10,000

The scheme is designed so that for every 80p you put in, the state will add 20p – so it effectively gives you basic-rate tax back on what you pay, hence the scheme's name.

In total you'll be able to use the scheme to pay for up to £10,000 of childcare per child each year – so you could get an extra £2,000 per child (up to £4,000 if your child is disabled) each year.

Say your childcare bill was £500/month... you'd pay £400/month with the remaining £100 of the bill picked up by the Government; across the year, this would cut your £6,000 annual costs to £4,800.

Once your childcare bill exceeds the Government maximum, there's no more financial support. Say your childcare bill for one child is £1,000/month, you'd pay £800 and have £200 paid for – after 10 months, once the £2,000 maximum support has been reached, you'll then have to pay full whack.

The scheme is available to ALL eligible workers incl the self-employed

Tax-Free Childcare will be open to all qualifying parents, unlike childcare vouchers, which can only be bought by people whose employer offers the scheme.

If you work for yourself, you've previously not been able to take advantage of Government schemes to cut the cost of childcare – until now. The new scheme is open to self-employed people (and anyone else whose employer isn't offering childcare vouchers) and allow them to take advantage of the 20% tax perk.

However, you and your partner will need to be in work to qualify – so if you're self-employed and your husband or wife doesn't work, you won't be able to take advantage.

Your child must be under 12

picture of new baby in box

The scheme's available to parents of children up to and including the age of 11 (or 16 for children with disabilities). This is slightly lower than the 15 years of age limit for kids with the vouchers scheme but the same for children with disabilities.

Both parents or partners in the household must be working & you'll need to earn at least £120/week

To qualify, you'll both need to be working and earn a minimum of the equivalent of 16 hours/week at the National Living or Minimum Wage (currently £120/week).

You can work fewer than 16 hours/week as long as your weekly income is more than the £120/week minimum. If you're self-employed and your income varies hugely on a weekly basis – eg, £50 one week, nothing the next, then £500, then £750 – it won't matter; as long as your three-monthly average meets the £120/week minimum, you'll be eligible.

You also need to earn less than £100,000 a year – this applies to both, so if one earns more then, as a couple, you can't access Tax-Free Childcare. It will also be available to parents on paid sick leave.

If you're on paid and unpaid statutory maternity, paternity and adoption leave, it still counts as being in work so you can still benefit from the scheme; however, eligibility is limited to the last 14 days of leave (for the baby whom you're off with). You can apply for other children you have though so you can still use the scheme for older siblings.

What about illness, disability or any caring responsibilities I may have?

Although the rules say both parents need to be in work, you'll still be eligible for a childcare account if you or your partner is in work and the other is not able to and receives any of the following benefits:

  • Incapacity benefit or long-term incapacity benefit

  • Severe disablement allowance

  • Carer's allowance

  • Contribution-based employment and support allowance

  • National insurance credits (because of incapacity or limited capability for work)

Parents of under-fours are first to benefit but pre-register NOW if your children are older

picture of baby in dinosaur costume

The Government has launched a new website called Childcare Choices which allows you to apply for the scheme – so if your child is – or children are – aged under four on 31 August 2017, you can sign up now. All parents of disabled children under 17 years old can also now apply.

Parents with older children can also sign up for email alerts that will notify them when they can apply, so make sure you keep an eye out for alerts when they come.

Although the scheme has now begun its rollout – and will extend to all children by the end of December – here's what we know so far:

  • Parents of under-fours will be first to benefit (they must be aged under four on 31 August 2017), with the scheme being rolled out to all parents by the end of this calendar year.

  • Any parent with more than one child will be able to sign up to cover all their children as soon as their youngest child becomes eligible.

  • You'll need to set up an online childcare account via Childcare Choices to use the scheme – and you'll be able to transfer money in from your bank as you would any other 'savings' account. Only one parent can open the account – though both can, of course, use it – so you'll need to decide in whose name you open it.

    The Government will then top it up with the extra cash the same day. So put in £80 on Monday, and it should be boosted to £100 hours later. Others such as grandparents or family friends can also put cash in.

  • You'll be able to spread the cost of childcare, ie, pay in more some months, for example, to cover the cost of the extra childcare needed during holiday periods.

  • Every three months, it's also necessary to 'reconfirm' your eligibility. You need to do this using your childcare service account, and simply have to click a box saying your circumstances haven't changed.

    The Government says you'll be reminded to do this in a message, four weeks before each reconfirmation deadline.

Check to make sure your childcare provider's registered with a regulator such as Ofsted so they'll be eligible for the new scheme

picture of crayons

Childcare could be any breakfast club, nursery, playgroup, nanny, childminder or au pair – the crucial element is that your provider must also be registered with a regulator such as Ofsted, the Early Years Register or the Childcare Register to count as childcare under the scheme.

However, they must also be registered with the new Tax-Free Childcare scheme for you to be able to sign up. It's worth checking with your provider that they're registered or in the process of registering now, so they're ready for when you can open a Tax-Free Childcare account.

They will then appear on the Childcare Provider Checker – when you eventually log in to your account you'll be able to see details of all registered providers. If your provider's on there, you'll be able to send payments directly through your account to the provider's bank account via the BACS system.

Which scheme will be better for you – Vouchers or Tax-Free Childcare?

Childcare vouchers allow you to pay for childcare from your PRE-TAX salary.

From April 2018, no new entrants will be able to join the Childcare Vouchers scheme (see our full guide for more information on how Childcare Vouchers work). 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.

While this won't be a problem for many as Tax-Free Childcare will replace the voucher scheme, SOME families who are eligible for vouchers, but aren't eligible for the new scheme will lose out massively.

A lot depends on how much you earn, how much tax you pay, and how much you pay for childcare. Here's our handy infographic to help determine which scheme is best for you:

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So who are the winners and losers under each scheme?

See where you fall under the new scheme:

Tax-Free Childcare wins for:

  • Self-employed people or couples who earn less than £100,000 each, 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.
  • Higher earners, as anyone earning £100,000+ (or in a couple where one earns £100,000+) isn't eligible for the scheme, whereas these high earners can get childcare vouchers.

Here's a couple of quick examples to see how it could work in practice...

Example 1. Low childcare user

Olly Onechild and his wife spend £500 of childcare across the MONTH for after-school clubs and pick ups.

If both are basic-rate taxpayers using vouchers, this would cost them £344 – a saving of £156 compared to not using them.But if they used the new TFC scheme, it'd cost them £400 – £56 more expensive than vouchers.

If both are higher-rate taxpayers using vouchers, this would cost them £396 – a saving of £104 compared to not using them. And if they used the new TFC scheme, it'd cost them £400 – £4 more expensive than vouchers.

Example 2. High childcare user

Molly Muchcare and her wife have two toddlers and spend £2,000 of childcare (in total for both toddlers) across the MONTH for nursery and pick ups etc.

If both are basic-rate taxpayers using vouchers, this would cost them £1,844 – a saving of £156 compared to not using them. But if they used the new TFC scheme, it'd cost them £1,668 – £176 cheaper than vouchers.

If both are higher-rate taxpayers using vouchers, this would cost them £1,896 – a saving of £104 compared to not using them. And if they used the new TFC scheme, it'd cost them £1,668 – £228 cheaper than vouchers.

If you want to break this down even further we've produced a table looking at different family circumstances to see which scheme is the winner. We've examined savings at a level of £10,000 childcare costs per child per year, and assessed who'd win and under which scheme...

Childcare Vouchers vs Tax-Free Childcare – how much can you save?

What to do if Tax-Free Childcare is better for you

What to do depends on whether you're already signed up to Childcare Vouchers, or you're only planning to sign up.

I'm already signed up to get childcare vouchers

If you're already signed up to the Childcare Vouchers scheme with your employer, then you can continue claiming them until your employer stops offering them, or you change jobs.

HM Revenue & Customs has told us when Tax-Free Childcare commences, parents wishing to move from Childcare Vouchers to Tax-Free Childcare can apply for the new scheme.

After applying for Tax-Free Childcare you'll then need to give your employer written notice that you want to permanently leave their voucher scheme to sign up to Tax-Free Childcare.  This needs to be done within 3 months. The easiest way to do this is call your voucher provider direct and ask them to stop your membership of the scheme.

How each company scheme deals with this may vary hugely – feedback so far has been limited. Some firms may not have anticipated demand to leave the voucher scheme, with staff struggling to be helpful. Others don't appear to have a clear voucher refund policy for those who bulk bought in advance but now want to switch to the Government alternative.

I'm not signed up to any scheme

It'll simply be a case of making sure you sign up to the new Tax-Free Childcare scheme.

It's worth noting that it'll only be available to parents of the youngest children from April 2017 and parents of other children later in the year, so if you'll be paying for childcare before the new scheme is available to you then you may wish to consider Childcare Vouchers in the interim.

What to do if childcare vouchers are better for you

If you're already signed up, you don't need to do anything, but if you're not yet signed up, you need to act before April 2018, or you could miss out.

I'm already signed up to get childcare vouchers

If you're already signed up to the Childcare Vouchers scheme with your employer, then you can continue claiming them until your employer stops offering them, or you change jobs.

I'm not signed up to any scheme

If Tax-Free Childcare won't work out as well for you as Childcare Vouchers, but you're not yet signed up, then you need to do this by April 2018 or you'll miss the boat. However, this may be easier said than done – your employer will need to offer the scheme, plus you must already have a child to start claiming.

If your employer doesn't offer the scheme, then you could try to persuade it to start offering it, but given there's less than two years to run, your employer may not regard it as worth the effort to make the change to the payroll..

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