Tax Free Child Care v Childcare Vouchers

HMRC have recently confirmed that the second phase of the roll-out of the new 30 hours free childcare has commenced.

Eligible parents will be able to apply online via the Childcare Choices

Tax-Free Childcare gives eligible families up to £2,000 free per child towards childcare costs up to the age of 11 (16 if disabled). launched in April 2017 for the youngest children and will be rolled out to all ages by March 2018.

Currently and since April 2017, every parent of three and four-year olds is entitled to 15 hours of free childcare per week.

This 15 hours can be increased to 30 hours provided:

  • Both parents work the equivalent of 16 hours a week and are being paid national minimum and living wage, and
  • each parent earns less than £100,000 per annum.

On registering, the parent receives a code, which in turn allows them to arrange their childcare place. Parents can take their code to their provider or council, along with their National Insurance Number and child’s date of birth. Their provider or council will check the code is authentic and allocate them a free childcare place.

The historic employer Childcare Voucher scheme remains open to new joiners until April 2018, but will be closed new joiners after 5th April 2018.

A childcare voucher is acquired from an employer and paid for from a parent’s salary before it’s taxed.  The voucher can be used to pay for childcare provided by a registered child care provider.  The scheme is generally operated under a salary sacrifice arrangement.  The main problems with providing support for childcare via the voucher scheme is that the self-employed are unable to participate and many employers would not offer the schemes.

If you’re already signed up to the Childcare Vouchers scheme with your employer, then you can continue claiming them until your employer stops offering them, or you change jobs.

Summary of Voucher Scheme

  • The childcare voucher scheme is available to any working parents in the UK.
  • It is organised through your employer and it must run the scheme.
  • Each parent can convert up to £243 per month into vouchers via salary sacrifice.
  • As the money is swapped before tax and national insurance deductions, parents can save up to £930 per year.
  • The vouchers can be spent on registered childminders and regulated nurseries, playgroups, nurseries and after school clubs.
  • The vouchers must be used by the 1 September after your child turns 15, or 16 if they are disabled.

With the closure of the voucher scheme to new joiners from April parents should review which of the schemes works best for them. Parents cannot use Tax-Free Childcare at the same time as they receive childcare vouchers.

We have summarised some of the points below to consider in making the decision on which to claim before the voucher scheme closes.  In addition, there are plenty of online calculators to assist with the decision process.

Tax-Free Childcare wins for:

  • Self-employed people or couples who earn less than £100,000 each, as they’re eligible for Tax-Free Childcare, but can’t get childcare vouchers.
  • Parents with more than one child and high childcare costs, as the help available goes up with the number of children. There’s a limit for childcare vouchers which isn’t dependent on the number of children.

Childcare Vouchers win for:

  • Couples where one parent doesn’t work, as they’re not eligible for Tax-Free Childcare, but the employed parent is eligible for vouchers (provided their employer offers a scheme).
  • Basic-rate taxpayer parents with total childcare costs of £9,336 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare.
  • Higher-rate taxpayer parents with total childcare costs of £6,252 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare.
  • Higher earners, as anyone earning £100,000+ (or in a couple where one earns £100,000+) isn’t eligible for the scheme, whereas these high earners can get childcare vouchers.

If you are currently using the vouchers and wish to move to tax-free childcare you can apply for the new scheme.  After applying for Tax-Free Childcare you’ll then need to give your employer written notice that you want to permanently leave their voucher scheme to sign up to Tax-Free Childcare.  This needs to be done within 3 months. The easiest way to do this is call your voucher provider direct and ask them to stop your membership of the scheme.