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Tax Free Childcare - Crowther Image

From early 2017 HMRC will introduce a new tax-free childcare scheme which will be phased in and this will offer working families 20% support towards the costs of qualifying childcare costs.

The new tax-free childcare scheme will replace the Employer Supported Childcare Scheme, more commonly known as the Childcare Voucher Scheme.

The old Childcare Voucher Scheme was only available to full time employees of a company but the new tax-free childcare scheme is now also available to the following:-

  • Self employed
  • Part-time workers
  • Those on maternity, paternity or adoption leave
  • Those starting up their own business

How it works
For every £8 you pay into a Childcare account, the Government will pay in an additional £2, subject to a maximum of £500 every 3 months per child, or £1,000 every 3 months if your child has a disability.

Your contributions will be paid into an online Childcare account which is being provided by National Savings & Investments (NS&I) and the same account will be topped up by the Government. Other family members can also pay into the account if they wish. Your childcare provider will then be paid directly from this account, subject to sufficient funds being available.

Should you no longer need the account then you are able to withdraw the remaining funds but only those you have personally contributed. Based on the amount withdrawn, the Government will withdraw the contribution it has made based on that amount.

You are able to build up a credit on the account for when you may need it, i.e. school holidays and the account will have no fees.

Who is eligible?
You are eligible for a tax-free childcare account if all of the following apply:

  • Aged 16 years or older
  • Live and work in the UK
  • Do not receive tax credits, Universal Credit or childcare vouchers (Child Benefit, child maintenance payments and free childcare for 2-4 year olds are unaffected)
  • Are working, either employed or self-employed. If you are part of a couple then both of you must be working.
  • Earn at least £115.20 per week each on average, unless:
    – You’re under 21 or an apprentice: you must expect to earn the equivalent of 16 hours at the National Minimum Wage rate that applies to you
    – You’re self-employed and recently started a new business and are still in your start-up period (typically during your first year of trading).
    – Do not expect to earn more than £100,000 each in the current tax year.

You are also able to apply if you are on leave (sick leave, ordinary or additional maternity, paternity, adoption leave or getting Maternity Allowance, shared parental leave, annual leave) or about to start a new job.

Illness, disability or caring responsibilities
You are also eligible for a Childcare Account if you or your partner is in work and the other receives any of the following benefits:-

  • Incapacity Benefit or long-term Incapacity Benefit
  • Severe Disablement Allowance
  • Carer’s Allowance
  • Contribution-based Employment and Support Allowance
  • National Insurance credits because of incapacity or limited capability for work

If you don’t have a partner
If you don’t have a partner, you can still apply to open a tax-free childcare account. However, if you are jointly responsible for a child then you need to agree who should apply because only one person can open a tax-free childcare account for a child.

Eligibility: The child

  • Usually lives with you even if you are not their parent (excluding foster children)
  • Is under 12 years old (up to the September following the child’s 11th birthday) if they don’t have disabilities, or
  • Is under 17 years old (up to the September following the child’s 16th birthday) and;
  • Receives Disability Living Allowance or Personal Independence Payment, or
  • He or she has been certified as severely sight impaired or blind by a consultant ophthalmologist

You may also apply for tax-free childcare for adopted children once a court has made an adoption order.

You cannot get tax-free childcare for the following:

  • Foster children
  • Children who are living away from your home for 6 months or more
  • Children who are in a secure children’s home/training centre or a young offender’s institution
  • Children who are being looked after by a local authority (even if they are living in your home), unless this is for short-term respite care.

You can only use this account to pay for childcare costs to help you work and the childcare must be from an approved childcare provider.

You will also have to reconfirm your eligibility for these payments every 3 months.

For those already in the old Employer Supported Childcare scheme
If you are already in the Employer Supported Childcare scheme / Childcare voucher scheme then you have the option to remain in this scheme or move to the new Tax-free Childcare scheme. However, you will not be able to remain in the old scheme for one child and apply for the Tax-free Childcare scheme for another child in the future so at that point you would have to leave the old scheme.

The old Employer Supported Childcare scheme will be closed to new entrants once the Tax-free Childcare scheme is introduced but existing members will not see any changes to their benefits of the old scheme and will continue as previous.

If you are considering moving to the new Tax-free Childcare scheme then you need to consider which scheme will benefit you most.

The key factors to consider are:

  • Whether one or both parents is in the ESC scheme
  • The rate of tax you pay
  • How many children you have
  • Your overall childcare costs offer a Childcare calculator to show your personalised savings under your existing Childcare Voucher scheme and the new Tax-free Childcare scheme. We would strongly recommend that you take a look at the following website before making a decision to switch:

If you are still unsure then please contact us and we will help you make the right decision.

Please remember that this comparison is for existing members of the old scheme only and is not a consideration for anybody who has not taken advantage of the old tax savings scheme as this will be closed as soon as the Tax-free Childcare scheme is launched.

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