If you’re a working parent, you can apply for Tax-Free Childcare for all children up to 12 years (16 if they have a disability). Tax-Free Childcare have replaced Childcare Vouchers which are now not available to new applicants from October 2018.
If you haven’t started using childcare yet (such as if you’re on maternity leave), you can still set up an account to start saving.
What are childcare vouchers?
Childcare vouchers are a government-approved tax efficient way to pay for childcare, an employee benefit to all eligible staff. Employees who are basic tax rate payers are able to exchange up to £243 a month for childcare vouchers. If you are a higher tax rate payer, you could claim up to £124 a month. The benefit means that you could save on tax and national insurance as the exchange happens pre-tax.
The scheme works by ‘salary sacrifice’, meaning that you give a percentage of your salary which would usually be taxed, and you receive the amount back in childcare vouchers, saving you the difference in tax and national insurance contributions.
However, after long discussions about the voucher scheme, which was introduced in 2005, the government have now introduced a cut-off date of 4th October 2018 for employees being allowed to take advantage of the benefit. Those who are already part of the scheme and signed up prior to April 2018, and whose employers continue to offer the scheme can carry on, but there will be no more opportunity for new employees to join the scheme. Also, if an employee leaves the scheme, they will not be able to re-join.
What is tax-free childcare?
In April 2017, the government introduced a new initiative for working parents, ‘Tax-Free Childcare’, to replace the childcare vouchers scheme.
Tax free childcare offers parents a 20p top up for every 80p they pay into childcare, up to a maximum of £500 per quarter; an amount of £2,000 per year, per child to help with the cost of childcare. This could be up to £4,000 if the child has a disability. There is a need to re-confirm that you are eligible for the scheme, or you could be faced with payments being stopped.
The scheme is open to all parents who have children under 12 years of age (16 if disabled) and works by parents paying childcare funds into a dedicated government online account, where the government will match a parents 80p payment with a 20p contribution.
The maximum income for parents to be eligible is £100,000, whereas the childcare vouchers did not have an income limit.
You can check on the HMRC website whether you are able to get help with childcare costs.
The points to remember for eligibility:
- Parents need to be earning a minimum of £115 per week, both parents need to be working
- Parents must earn less than £100,000 a year
- Parents need to work a minimum of 16 hours per week (minimum of 8 hours each if a couple)
- The maximum age childcare can be paid for is 12
How to claim
The online claim process for Tax Free Childcare is a joint application process with ‘30 hours free childcare’. These are two separate government schemes, but they share one online application – you can claim one or both of them during the application process.
You’ll need a Government Gateway account before you can apply, this is simple to set up if you’ve not yet set one up, just follow the on-screen instructions.
It’s worth noting that you are not entitled to Tax Free Childcare if you claim tax credits (any type of tax credits) or universal credit. If you do submit a claim for Tax Free Credits, your whole tax credits award (both child tax credit and working tax credit) will stop automatically. The same will apply for universal credit.
Once you set up an account, you will pay your childcare provider via this account. Every child will have a Tax-Free Childcare reference number. You can use this number to help identify payments. For every £8 you pay into the account, the government will pay in £2, up to the maximum government contribution, which is £2,000 per child per year.
Gov.uk has a calculator that can help you choose between the two schemes, if you are unsure which would be more beneficial for your personal circumstance.
We recommend that you seek expert advice if you are unsure, before making a decision. If you’d like to get in touch, we’d be happy to help and point you in the right direction.