Tax-free Childcare guide

tax-free childcare guide

In March 2014 the then coalition government first launched the Tax-Free Childcare Scheme with an anticipated rollout date of late 2015, however due to a legal challenge the launch was delayed until April 2017. Tax-Free Childcare gives eligible families up to £2,000 free per child towards childcare costs. Due to the new scheme the existing Employer Supported Childcare Vouchers schemes (ESCV) will close to new applicants from 4th October 2018 (although existing schemes can continue to provide for those within the scheme at that date.) 

Tax-Free Childcare Scheme

The scheme is an online account which you can pay into to cover the cost of childcare with a registered provider. For every 80p paid into your account the government will top up an extra 20p, this is the equivalent of the tax most people pay – 20% – which is how the scheme gets its name, ‘tax-free’. The government will top up the account with 20% of childcare costs up to a total of £10,000, the equivalent of up to £2,000 support per child per year (or £4,000 for disabled children). 

Unlike the Employer Supported Childcare Vouchers, Tax-Free Childcare doesn’t rely on employers offering the scheme, any working family can use Tax-Free Childcare, provided they meet the eligibility requirements. This means the scheme will also be available for parents who are self-employed.

What are the Qualifying Conditions?

The Adult

  • Either
    • Be in work and earning at least the minimum/living wage for their age for 16 hours per week or at least £125.28 per week or,
    • Be self-employed, with the expectation of making a profit
  • Not have a taxable income of over £100,000 per annum
  • Not receiving Tax Credits or Universal Credits
  • Not receiving childcare support from an employer or receiving childcare costs through any other government childcare scheme

The Child

  • The child will be a qualifying child until the end of the week in which the 1st September falls following the child’s 11th birthday (16th birthday if disabled)
  • Must usually live with the adult, must not be a foster child, must not be in a secure children’s home or young offender’s institution and must not be in the care of a local authority.
Operating the account

The first £2000, or £4,000 for a disabled child, which is paid into each account in an entitlement period will get topped-up by £500, or by £1,000 if the child is disabled. Any further payments made into the account above this amount will be held separately and not get topped-up until the next entitlement period starts. Payments to Childcare providers can be made as regular or one-off payments, however, Childcare providers must be signed up to receive them. Parents will need to reconfirm the account eligibility every 3 months, if the account becomes none eligible it will be classed as ‘pay-only’ and will not be topped up by the government.

Employer Supported Childcare Vouchers

Childcare vouchers allow you to pay for childcare from your pre-tax salary, therefore reducing the amount of your salary that is taxable. You can take up to £55 a week (depending on your total income) of your wages as childcare vouchers which you do not have to pay tax and NI on, so that’s a saving of:

  • £930 per parent for basic rate tax payers
  • £624 per parent for higher rate tax payers
  • £590 per parent for additional rate tax payers

What are the Qualifying Conditions?

  • Only available if the employer offers them
  • No minimum earnings requirement, just one parent needs to be in work
  • The maximum age of a qualifying child is 15 (16 if disabled)
  • No maximum income limit.

So, which is the best option for you?

Well, before applying for either the Tax-Free Childcare Scheme or Employer Supported Childcare Vouchers make sure you are getting the benefits you are entitled to! Every parent in England is entitled to 15 hours’ free nursery provision per week (your provider will fill in local authority paperwork with you) across 38 weeks a year. In September 2017 this doubled to 30 hours (in England), however, to be eligible for the additional 15 hrs/week you need to work the equivalent of 16 hrs/week at national minimum and living wage (if in a couple both must work) and no one parent can earn £100,000+ in a year.

Also, if you pay for childcare, work 16+ hours a week (couples must both work) and have a family income of less than £46,000 you could be entitled to childcare tax credits. There is no guarantee, but it would be worth checking to see if you are. If you are entitled they’re usually a better option than what’s detailed above. Please note, you won’t be able to get the childcare tax credit (childcare element of working tax credit) or universal credit if you’re signed up to the new Tax-Free Childcare scheme.

As for the schemes, if you’re self-employed or have more than one child and high childcare costs tax-Free Childcare is usually the winner. If you’re a couple where one parent doesn’t work or have fewer kids and low childcare costs Childcare Vouchers are usually the best option.

If you would like any further clarification, please do not hesitate to contact us.


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