In April, the Government introduced a new way of obtaining tax-free childcare – the Tax-Free Childcare Account. Father of two and tax guru, Andrew Simm, explains how it works.
With the Tax-Free Childcare account, parents will hold an account with HMRC. For every £8 paid into this account, the Government will top this up to £10. Each child will be entitled to up to £2,000 support each year – so the account will be topped up to £10,000 if £8,000 is paid into it.
To qualify for this scheme parents will have to be in work, with each earning at least £120 per week and not more than £100,000 each per year.
The scheme is being rolled out gradually during 2017. Initially it will be available to parents of children under 4 years old (as at 31 August 2017), and then to all parents by the end of the year.
Unlike the current Childcare Voucher system the employer does not need to take part. The Childcare Account is available to all qualifying parents, including parents that are self-employed. There will even be a start-up period during which self-employed parents will not need to be earning the minimum amount.
But if you’re happy with using the Childcare Voucher scheme don’t worry, you don’t have to withdraw from this and you can still join. It’s open to new entrants until April 2018, and will continue to be available for those within the scheme for as long as the employer offers it.
Which scheme to use?
Whilst the new tax-free Childcare Account may offer more flexibility in terms of who can have one and it not being tied to an employer, if your employer does offer the existing Childcare Voucher scheme it may be more beneficial to go with that before new entrants are stopped in April 2018.
That’s because the current Voucher scheme allows basic-rate taxpayer parents tax-free vouchers of up to £243 per month. For higher-rate taxpayer parents, the monthly limit is £124.
So for example, the cost to a higher-rate taxpayer parent buying Vouchers worth £120 per month will be £72 per month once the tax saving is taken into account.
Using the new Childcare Account,they would need to contribute £96 to have this topped up to £120.
Free childcare hours
It’s worth remembering that the Government currently funds 15 hours of free childcare per week for 3-4 year-olds. From September 2017, this is being doubled to 30 hours for 38 weeks of the year. To qualify, both parents must be working a weekly minimum of 16 hours, and each parent must be earning less than £100,000.
Finally, it’s worth a quick re-cap on the rules surrounding Child Benefit. The Government currently pays Child Benefit amounting to £20.70 per week for the eldest child and £13.70 per week for other children. This benefit is gradually withdrawn as income increases between £50,000 and £60,000.
Any overpaid benefit is paid back in the form of a tax charge via self-assessment. It is the higher earner’s responsibility to pay this back, even if they have not received the benefit.
Remember that total income is reduced by gift aid donations, so it is important to include these on your tax return.