The Government’s new Tax-Free Childcare scheme from Autumn 2015
The Government is replacing the existing childcare voucher scheme (currently some parents purchase vouchers through their employer’s payroll and save on tax) with the tax-free childcare voucher scheme from Autumn 2015.
The new tax-free childcare voucher scheme will be administered by National Savings (government) rather than by existing childcare voucher providers such as Fideliti, Edenred and kiddivouchers. Please click here for more information
The level of childcare costs covered by the new scheme will cover annual childcare costs of up to £10,000, providing savings of up to £2,000 per child.
Parent’s employers will be able to continue to set up a childcare voucher scheme until tax-free childcare is launched. Parents will be able to sign up for childcare vouchers until August 2015 and they can then continue to order vouchers beyond Autumn 2015, for as long as their employer continues to run the scheme. Some existing scheme members will choose to switch to the new scheme from 2015, as in some cases this will provide higher savings.
The new scheme will initially only be available in respect of children under 5, although there are plans to make it available for all children under 12 within one year.
The winners and losers
Currently Childcare Vouchers provide basic-rate taxpayers with savings of up to 32% of childcare costs, while higher-rate taxpayers save up to 42% of childcare costs. In comparison, Tax-Free Childcare provides savings of up to 20% of childcare costs.
The 20% rebate from Tax-Free Childcare applies to childcare costs of up to £10,000 a year per child, whereas the tax relief from Childcare Vouchers applies to costs of up to £2,916 a year per parent or £5,832 per couple.
In general, parents will only be better off under the new scheme if their childcare costs are higher than the figures shown in the table below. Parents with lower childcare costs would be better off carrying on or registering for childcare vouchers in the short to medium term.
Parents who receive tax credits are more likely to be disadvantaged
Parents are already not allowed to claim Childcare Vouchers for any childcare costs which form part of their tax credit claim. The interaction between Childcare Vouchers and tax credits is complex and parents who are eligible for help with childcare costs from tax credits are often better off not using Childcare Vouchers.
However, many families who don’t currently receive tax credits for their childcare costs do still receive tax credits at a rate of £545 a year – this is called the Family Element. The Family Element is not affected by Childcare Vouchers so many parents currently receive this benefit as well as being able to enjoy tax and National Insurance savings from Childcare Vouchers.
Under Tax-Free Childcare, parents will only be eligible for tax relief if they are not claiming any tax credits. This means that parents will need to opt out of receiving tax credits if they want to benefit from the 20% relief on childcare costs.
What action should parents take?
Parents who aren’t already using childcare vouchers should ask their employers to set up a scheme now, rather than waiting until the new scheme is launched in 2015. Employers enjoy National Insurance savings from the current scheme, so it is in their interest to set up a scheme before the 2015 deadline.
What role will there be for employers in the new scheme?
Although the new arrangements take the onus away from employers, the Government hopes that employers will still have a role to play. Many parents use childcare vouchers as a way of budgeting for childcare costs and appreciate the benefits of their childcare payments being taken direct from salary. Employers will be able to support their employees by gradually replacing their existing salary sacrifice schemes with voluntary payroll deduction schemes.