The winners and losers of the new Tax-Free Childcare system.

shutterstock_184534499 web size

Changes to the Child Care Voucher system were rolled out in April 2017. Parents who are already members of the current Child Care Voucher system can continue in it, providing their employer will still provide access to it; new members will also have the opportunity to join the current scheme up until April 2018.

The new system, called ‘Tax-Free Childcare’, is available online and the government will contribute 20p for every 80p that parents spend on registered childcare. This is the equivalent of the 20% tax many people pay on their earnings, which gives the scheme its name ‘Tax-Free Childcare’.

The maximum government contribution per year is £2,000 per child (or £4,000 for disabled children). Parents must be in work to qualify, with each parent earning just over £100 per week, but no more than £100,000 each per year.

Parents are able to apply by opening an online account which is available through the government website www.gov.uk. They pay into this account which is then topped up by the government. Parents then need to re-confirm their circumstances every 3 months. It is possible to pay in more some months, and less at other times, meaning parents can build up a balance in their account to cover times when they need more childcare than usual. E.g. summer holidays.

WEALTH at work, a leading provider of financial education, guidance and advice in the workplace, have outlined below examples of the ‘winner and losers’ of the new Tax-Free Childcare system.

Winners

• Basic rate tax payer families that spend more than £9331.20 a year on childcare
• Higher rate tax payer families that spend more than £6249.60 a year on childcare
• Families with lots of children (as funding is per child)
• Self-employed (as previously only available through employers)

Examples

Kim and Steve are both working and are both basic rate tax payers. They spend over £9331.20 a year on childcare, so will save more under the new scheme than the old scheme.

Rachael and Tom are both higher rate tax payers. They spend more than £6249.60 a year on childcare, so will save more under the new scheme than the old scheme.

Sally and Josh are both working. One is a basic rate tax payer, and the other a higher rate tax payer. They spend over £7790.04 a year on childcare, so will save more under the new scheme than the old scheme.

Amy and Sam are higher rate tax payers and both signed up for the Childcare voucher scheme before April 2011. They spend more than £12,247.20 a year on childcare for their two children. As the new Tax Free Childcare system allows them to spend up to £10,000 on each child, they will be better off under the new system.

Losers

• A basic rate tax payer who has access to childcare vouchers and spends less than £4,665.60 per year on childcare
– If both parents pay basic rate tax and have access to childcare vouchers, they would need to collectively spend less than £9331.20 on childcare to be worse off
• A higher rate tax payer who has access to childcare vouchers and spends less than £3,124.80 per year on childcare
– If both parents pay higher rate tax and have access to childcare vouchers, they would need to collectively spend less than £6,249.60 on childcare to be worse off
• Anyone earning more than £100,000
• Parents who live together, but only one parent is working
• Families with children aged between 12 and 15.

Examples

Mary and James are both working and are both basic rate tax payers. They spend £5832.00 a year on childcare and are £874.80 better off under the old scheme. This is the maximum savings difference for basic rate tax payers in favour of the old scheme verses the new scheme.

Joanna and Tony are both higher rate tax payers. They spend £2976.00 a year on childcare, so are better off by £818.40 under the old scheme. This is the maximum savings difference for higher rate tax payers in favour of the old scheme versus the new scheme.

Serena and John are both working. One is a basic rate tax payer, and the other a higher rate tax payer. They spend £4404.00 a year on childcare, so are better off by £846.60 under the old scheme. This is the maximum savings difference.

Julie and Miles are both higher rate tax payers and signed up for Childcare Vouchers before April 2011. They are still with the same employers. They spend £5832.00 a year on childcare, so are better off by £1603.80 under the old scheme. This is the maximum savings difference for higher rate tax payers who signed up before April 2011.

Chantelle and Ross are both additional rate tax payers. They are not eligible for the new scheme, so are better off under the old scheme by £1240.80, and £2741.04 if they registered for childcare vouchers before April 2011.

Jonathan Watts-Lay, Director, WEALTH at work comments; “Whether parents are better off with the old or new scheme depends on many factors including how much they earn, how much they spend on qualifying childcare, whether both parents work, how old their children are, and how many children they have. Parents who think they will be better off under the old scheme have until April 2018 to register with their employer (note: not all employers offer the scheme), and anyone who misses this deadline will only be able to join the new scheme.”

He concludes; “Parents that are unsure if they are a ‘winner or loser’ under the new tax free childcare scheme should speak to their employer. Many employers offer a range of benefits to help their employees to save money, as well as financial education to help their employees understand their saving options. It is always worth asking what support is available.”

The latest news is brought to you by WEALTH at work*, a specialist provider of financial education and guidance in the workplace.

*WEALTH at work and my wealth are trading names of Wealth at Work Limited which is a member of the Wealth at Work group of companies.