Tax-free childcare ... is it for your family?
By Margaret Taylor Personal finance editor
NEXT year will see the introduction of a long-awaited Government initiative designed to get more parents into the workplace by helping them meet the ever-growing cost of childcare. First announced in 2014, the taxfree childcare scheme promises to be more inclusive than the existing childcare voucher system because it will be administered by parents themselves rather than their employers.
This means that self-employed people and those whose employers do not offer childcare vouchers will be able to benefit for the first time, with the Government contributing a maximum of £2,000 towards a total annual childcare bill of £10,000 per child.
However, with parents having to choose between either tax-free childcare or childcare vouchers, they will have to work out which is the better option, something that Mumsnet chief executive Justine Roberts said will create confusion.
“Mumsnet users think that the scheme is good news for the self-employed, and the extra help for parents of disabled children is very welcome given the incredibly high childcare costs they have to deal with,” she said. “However, there is concern that single-income households might lose out while some very high-earning two-income households will benefit.
“Quite a few are also saying that they get a better deal with their own employer’s voucher scheme – although of course not all employers offer them,” Roberts said. There will be a period of adjustment and some confusion – users on Mumsnet were very aware of the scheme when it was announced back in 2014, but as there’s been a long gestation period it’s not current- ly at the forefront of most people’s minds.”
One of the main benefits of tax-free childcare is that it is open to all families where both parents work – or, in the case of a single-parent family, where that parent is in employment – with them rather than their employers being responsible for opening their own account.
Operated by National Savings & Investments in partnership with HM Revenue & Customs, online childcare accounts will be topped up by the Government, which will pay 20 per cent of each child’s childcare costs up to the £2,000 maximum.
While at face value this seems better than the maximum £930 per parent annual tax saving available with childcare vouchers, Sam McFaul of consumer finance website Money Saving Expert pointed out that which scheme is best suited to which family depends on how much parents earn, how much tax they pay and what their total childcare costs are.
“As a rule, people who will be better off under tax-free childcare are self-employed people or couples earning less than £100,000 a year each, or parents with more than one child and high childcare costs,” he said.
“People who would be better off with childcare vouchers are couples where one parent doesn’t work, basic-rate taxpayers with total yearly childcare costs of £9,336 or less, higher-rate taxpayers with total childcare costs of £6,252 or less, or any couple where one parent earns more than £100,000 a year.”
So while a single parent who earns £11,000 or less a year – not enough to pay any tax – would not be eligible for childcare vouchers, they would be able to claim tax relief of up to £2,000 per child under tax-free childcare.
Similarly, a couple who both earn over £150,000 would get nothing under the tax-free childcare scheme but could claim childcare vouchers up to a total value of £1,240.
While it is understandable that some people may be unclear about which system offers the best deal to their family, the fact that the childcare voucher scheme will close to new entrants in April 2018 means they will have to make the decision pretty swiftly after tax-free childcare comes in in late 2017.
Luckily help could soon be at hand, with the Family and Childcare Trust working with the Government to ensure families are not only made aware that the change is coming in but that they are given help in making their decision too. “The introduction of tax-free childcare will provide significant relief to many working parents, but it also adds more complexity to a childcare system parents already find confusing,” said Megan Jarvie, head of policy and public affairs at the Trust.
“Government needs to continue their current work to make sure that families know about tax-free childcare and can find out whether it is the best option for them.
“The Family and Childcare Trust is working with HMRC and the Department for Education on a number of initiatives to help make it as easy as possible for parents to work out which system is best for them.”