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What is Tax-Free Childcare?

Childcare costs are on the rise making it difficult for parents to return to work. The Government wants to make childcare more affordable so that parents are able to pursue career aspirations whilst young children receive high quality childcare which has been proven to improve children's life chances.

The Government announced the introduction of the Tax Free Childcare scheme at the 2013 Budget and initiated a Government consultation with a number of stakeholders, which included Parents, Employers, Childcare Voucher providers and Childcare providers.

Currently the government offers childcare vouchers to working parents which attracts both employee tax and NI savings, as well as offering employers relief on Employer NI contributions.

Employers and Employees have until April 2018 to join the Employer Assisted Childcare Scheme. The Government's Tax Free Childcare Scheme will begin to roll out to parents from early 2017 and will be available to all eligible families by the end of the year.

Following a legal challenge bought against the Government about the delivery of the Tax Free Childcare (TFC) scheme, the Supreme Court found in favour of the Government and deemed the TFC scheme to be lawful. The Government delayed implementation of their scheme due to a suspension being placed on any developments whilst legal proceedings took place. The Government has confirmed that the TFC will be launched in Early 2017.

 

The changes are planned to be introduced from Early 2017, where the current childcare voucher scheme will be replaced with a payment of up to £2,000 per child up to the age of 12 years old.
 
 

The table below details information on how the current Employer Assisted Scheme and the Tax Free Childcare compare:

 
 
 
  Employer Assisted Childcare Scheme: Childcare Vouchers Tax Free Childcare Scheme
Savings Each working parent can save £933, the savings are doubled to £1,866 for parents who both work. Employers make 13.8% Employer National Insurance savings. Parents can save up to £2,000 per child, per year. There is no Employer saving
Eligibility of Child Available for children up to the age of 15 (16 if disabled) Available for children up to the age of 12 (17 if disabled)
Employed Parents in the Family Only requires 1 parent to work to qualify Both parents must work to be eligible (unless single parent)
Income Criteria Parents who earn above the National Minimum Wage are eligible Each parent must work at least 16 hours. The upper limit for earnings is £100,000.
Commencement Date Currently in place and offered to working parents where their Employer has signed up to the scheme The scheme will begin rollout from early 2017 and will be available to all eligible families by the end of 2017.
 
 
 

The Tax Free Childcare scheme will be solely administered by National Savings & Investments (NS&I), rather than several providers as the current Employer Assisted Scheme is. The Government will design a gateway that will enable parents to register for the scheme and open a childcare account; pay in their money, receive Government top-ups and manage their childcare. Parents are expected to confirm their eligibility every quarter in order to qualify for the Government top-up.

The Government is proposing to top-up 20p for every 80p that the parent contributes with the maximum level being up to the value of £2,000 per child, per year.

 
 
 
Scenario Level of monthly childcare fees after which the Government's proposed Tax Free Childcare Scheme will be a better option
Single parent, basic rate taxpayer £389
Single parent, higher-rate taxpayer, joined childcare vouchers before 06th April 2011 £389
Single parent, higher-rate taxpayer, joined childcare voucher after 05th April 2011 £260
Working couple, both basic rate taxpayers £778
Working couple, 1 basic rate taxpayer and the other higher rate taxpayer, who joined a childcare vouchers scheme after 05th April 2011 £649
Working couple, both higher-rate taxpayer who joined a childcare vouchers scheme after 05th April 2011 £520
 
 
 

Example #1, below shows how a single parent paying basic rate tax with 1 child under 12 years is affected by each scheme depending on their level of childcare cover:

Monthly
Childcare
Annual
Childcare
Savings under current
Childcare Vouchers
Savings under new
Tax Free Childcare Scheme
£350 £4,200 £933 £840
£700 £8,400 £933 £1,680
 
 
 

Example #2, below shows how a working couple both paying basic rate tax with 1 child under 12 years is affected by each scheme depending on their level of childcare cover:

Monthly
Childcare
Annual
Childcare
Savings under current
Childcare Vouchers
Savings under new
Tax Free Childcare Scheme
£700 £8,400 £1,866 £1,680
£800 £9,600 £1,866 £1,920
 
 
 

Example #3, below shows how a couple with only 1 partner working and paying basic rate tax with 1 child under 12 years is affected by each scheme depending on their level of childcare cover:

Monthly
Childcare
Annual
Childcare
Savings under current
Childcare Vouchers
Savings under new
Tax Free Childcare Scheme
£700 £8,400 £933 £0*
£800 £9,600 £933 £0*
 

*Both parents must work to quality for the Tax Free Childcare Scheme

 

The following are useful links for further information on the Tax Free Childcare Scheme:

 
 
 
Download a copy of the Governments response to the Tax Free Childcare Consultation https://www.gov.uk/government/consultations/tax-free-childcare
Click on this link to view the 10 things that parents should know https://www.gov.uk/government/news/tax-free-childcare-10-things-parents-should-know
 
Sign-up today with a childcare voucher provider and start making the savings you are entitled to.
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      Increase in maximum support
Scenario Number of children under 12 Maximum support through Employer-Supported Childcare With £6000 cap announced at Budget 2013(1) With £10,000 cap (2)
Single parent or working couple with one basic rate tax payer in receipt of Employer Supported Childcare. 1 £933(3) £267 £1,067
2 £933 £1,467 £3,067
3 £933 £2,667 £5,067
   
Working couple,both basic rate tax payers in receipt of Employer Supported Childcare. 1 £1,866 -£666 £134
2 £1,866 £534 £2,134
3 £1,866 £1,734 £4,134
   
Single parent or working couple with one higher rate tax payer in receipt of Employer Supported Childcare(4). 1 £625 (5) £575 £1,375
2 £625 £1,775 £3,375
3 £625 £2,975 £5,375
   
Working couple, both higher rate tax payers in receipt of Employer Supported Childcare.(4) 1 £1250 -£50 £750
2 £1,250 £1,150 £2,750
3 £1,250 £2,350 £4,750
   
Working couple, one basic rate tax payer, one higher rate tax payer in receipt of Employer Supported Childcare.(4) 1 £1,558 -£358 £442
2 £1,558 £842 £2,442
3 £1,558 £2,042 £4,442
1: Based on claiming the maximum available support under Tax-Free Childcare as announced at Budget 2013, equal to £1,200 per child each year for childcare costs of £6,000.
2: Based on claiming the maximum available support under Tax Free Childcare, equal to £2,000 per child each year for childcare costs of £10,000.
3: Calculated by multiplying the maximum qualifying voucher amount a basic rate tax payer can receive each year (£2,916)by their marginal rate of tax (20 per cent) plus their marginal NICs (12 per cent): £2,916 x 32% = £933.
4: Where the higher rate earner(s) joined Employer-Supported Childcare after 5th April 2011.
5: Calculated by multiplying the maximum qualifying voucher amount a higher rate tax payer can rceive each year(£1,488) by their marginal rate of tax (40 per cent) plus their marginal NICs (2 per cent): £1,488 x 42% = £625.