Childcare Update: Childcare Vouchers and the New Tax Free Childcare Scheme

babycotIn 2014 the Government announced plans to introduce a new Tax Fee Childcare scheme to help parents with the cost of childcare. There’s been changes to the proposed launch date and the scheme hasn’t been widely publicised yet. This update provides the most recent information on the launch of the new scheme and some significant changes happening to childcare in 2017 and 2018.

Childcare Vouchers

HMRC have confirmed that childcare vouchers will close to new starters in April 2018. Up until that time, childcare vouchers will run in the same way as they always have. After April 2018, any employee who is in the scheme will be able to continue to receive childcare vouchers, and Salary Exchange have committed to continue to provide the voucher scheme for our clients until they naturally close, when the last employee no longer needs vouchers.

Tax Free Childcare

Tax Free Childcare is the Government’s new initiative which is rolling out now to parents with younger children, and will over the next year extend to children aged up to 12 years. This scheme is run by the Government, and employers will have no involvement with the administration of the scheme.

Free Childcare

Whilst the Free childcare arrangements are not directly linked to either of these two schemes, it worth noting the changes that are being put in place. Working parents are currently entitled to 15 hours per week of free childcare for 3 and 4 year olds, and this is increasing to 30 hours per week in September 2017 (where both parents work and earn less than £100k each per annum).  As is currently the case, employers won’t need to be involved in this.

Employees may choose to take childcare vouchers or Tax Free Childcare, and which scheme is right for them will depend upon their own circumstances.

These are the key differences between the 2 schemes:

Childcare Vouchers Tax Free Childcare
All working parents can apply for childcare vouchers even if their spouse/partner doesn’t work, or works less than 16 hours per week Both parents must be working at least 16 hours per week and earning at least £115 per week. Parents who earn over £100k cannot apply
Standard tax payers save 32%

Higher rate tax payers save 42%

Everyone saves 20%
Maximum annual savings £933.12 per working parent (£1,866.24 if both parents participate in the scheme) Maximum annual saving of £2,000 per child
Can be used to pay for childcare for children up to 15 or 16 with a disability Can be used to pay for childcare for children up to 12 or 17 with a disability

The table shows that parents with older children and those with modest childcare costs (which tends to be the case with school age children) will probably be better off with childcare vouchers.

Tax free childcare may be the better option for parents with at least one very young child and significant childcare costs.

Here’s a link to the Government website giving further details to help working parents understand the various options. There’s a useful calculator too tool so they can work out which option would suit their circumstances best

A few important points to note:

  • With the extension to 30 free hours per week for 3 and 4 year olds, it seems likely that it will only be parents with very young babies and toddlers under 3 years old who will have large childcare costs (Tax Free Childcare allows employees to save £2,000 if they deposit £8,000 so this would require an employee to be spending c£10k per annum on childcare to make this level of saving).
  • Parents with older children (unless they have a disability) may be better off with childcare vouchers as Tax Free Childcare can only be used for children up to 12 years old. Childcare vouchers can be used for children up to 15 years old.
  • Employees who earn more than £100k pa and/or whose spouse or partner works less than 16 hours per week and earns less than £115 per week will be ineligible for Tax Free Childcare so childcare vouchers will be the best option.

Over the coming months, we will be working with all our clients to ensure the message about the changes to childcare is communicated effectively so each working parent makes the choice that’s right for them. Although employees who take childcare vouchers may switch to Tax Free Childcare at any time after April 2018, the reverse is not possible which makes this a vital decision for each parent to make to avoid missing out on help with childcare costs.

If any employee is in any doubt about the best option for them we would recommend they sign up to childcare vouchers for a nominal amount of £10 per month to lock in their entitlement moving forward.

Salary Exchange will be providing a range of communications to help our clients ensure employees understand what’s changing, but please speak with your Account Manager if you have any queries or concerns in the meantime.

If you don’t already offer childcare vouchers for your employees and you’d like to find out more about this valuable benefit before it’s too late, please get in touch on 0330 2000 104. The scheme can be set up very quickly so your employees don’t miss out.

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