Tax-Free Childcare

February 15, 2017

As of April 2017, it is possible to join the new Tax-Free childcare scheme.

Parents will need to open an online account (per child) and for every 80p the parents contribute, the government will top this up with 20p, up to a maximum of £2,000. The childcare costs are then paid from this account by the parent. There is no employer involvement using this method.

To be eligible for the new scheme:

Children must be 12 (or under) or disabled children under the age of 17

Both ‘parents’ (or the lone ‘parent’) must be in work and both must be over 16 at the time the declaration of eligibility is made

The employee must meet the “minimum income limit” requirements which are set at 16 hours at the National Living Wage (16 x £7.20 = £115.20 )

The person / persons must be resident in the United Kingdom at the time the declaration of eligibility is made

The family will not be receiving childcare support via either the Working Tax Credit or the Universal Credit

The person / persons and partner must not be in a childcare voucher scheme

Annual earnings must be less than £100,000, i.e. for a couple joint income must be less than £200,000

Those who are self-employed do not have to earn at the minimum income level to be eligible

Childcare Vouchers

The current childcare voucher scheme is still available (ceasing April 2018) and most are operated via ‘salary sacrifice’ and by reducing the employee’s gross pay (ensuring this does not drop below the National Minimum Wage) the employee will have a saving on tax and NIC and employers also benefit from an NIC saving worth up to £402 a year per scheme member.

If the scheme is running as a ‘salary sacrifice’ the employer must ensure the employees contract and terms and conditions are updated to include this diversion of remuneration.

The exact amount employees can save depends on their rate of tax, the amount of NI they pay and the total value of vouchers they redeem every year. Basic rate tax payers can save a maximum of £933.

Most employers sign up with a childcare voucher provider, the employee then requests the vouchers (via the provider), vouchers are given to the carer and the carer is paid directly by the voucher provider. Each month the employer is notified of the amount to deduct from the payroll.

Using a provider will reduce the amount of admin on the employer, however there is normally a monthly charge. Childcare voucher providers:

For the parent to benefit from the Tax and National Insurance exemption, you must have parental responsibility for the child, who must be under 15 or under 16 if disabled. The childcare provider must hold either a current registration certificate (with a unique reference number (URN) or an approval certificate with an expiry date and reference number).

The existing Childcare Voucher scheme is open to new joiners until April 2018. At this point the scheme will close to new joiners.

Beyond April 2018, existing scheme members will continue to:

receive employer funded Childcare Vouchers as they do today.

they will continue to benefit even if;

they would not be eligible for the new scheme or

choose not to participate in the new scheme, or until

the child is 15 years old (or 16 years old if disabled), whichever is sooner

Who Gains with the new scheme?

Those working single parents who have annual child care costs at or above £5,000.

Working couples with annual child care costs at or above £9,500.

Self-employed couples providing they meet the eligibility criteria.

Who Loses with the new scheme?

Couples where one parent is not working.

Couples who have a single child.

Families where the childcare costs are minimal such as those who have children at school full time and so rely on part time care from Childminders or After School Clubs.

Employers no requirement for company/payroll intervention and so no NIC relief.

Where either parent earns in excess of £100,000 per annum.

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