Tax Free Childcare: The new scheme and its impact on you

Written by Sharon Redfern on 21 May 2015

From Autumn 2015, a new scheme called Tax-Free Childcare will become available for eligible families. Those already members of the childcare voucher scheme will be able to continue to stay in the scheme as long as your employer runs the scheme or you stay with your employer. As from Autumn 2015, no new entrants will be able to join the old scheme so it is vital to consider your options now to see which scheme benefits you the most.

So how does the new scheme differ from the old?

Under the old childcare voucher scheme, an employee is given vouchers of £55 per week (£28 per week for higher rate (40%) earners and £25 per week for additional rate (45%) earners). The vouchers received are taken out of pre-tax and national insurance income which, on average, can save parents approximately £1,000 per year. However, they are only available from employers so if your employer has not enrolled in the scheme, they will not be available to you.  

The good news is that under this scheme both working parents can receive the vouchers if their respective employers run the scheme but the bad news is that the amount of vouchers received does not vary with the number of children you have.

Under the new scheme, eligible families will get 20% of their annual childcare costs paid for by the government. So for every 80p paid into a designated Childcare Account, the Government will contribute 20p. This is up to a maximum of £10,000 (so £8,000 paid into by the parent and £2,000 paid into by the Government). The contribution paid is per child so for a two child family this will be £20,000 with £4,000 paid by the Government.

To be eligible you will need to:

1.       Have one or more children aged under 12

2.       Be working (beware! Both parents have to be working if you are a couple)

3.       Earn between £2,420 to £150,000 per annum (joint income if you are a couple)

4.       Not be claiming tax credits.

The key benefit of the new Tax-Free Childcare scheme is that the self employed or couples who earn less than £150,000, are eligible for the scheme, which they aren’t under the old scheme.

So which scheme should I be in?

This very much depends on your earnings (individually and as a couple), your marginal rate of tax, the number of children and your childcare costs.

In general, the new scheme is for you if you are:

1.       Self employed earning less than £150,000

2.       A couple, both working and earning less than £150,000

3.       A family with more than one child and high childcare costs

You are probably better staying with the old scheme (or joining the old scheme if your employer is enrolled in the childcare voucher scheme before Autumn 2015) if:

1.       You are a couple earning more than £150,000 jointly

2.       You are a couple and one parent doesn’t work

For the self employed earning more than £150,000, it is now worth considering running your business through a Limited Company. You can then become an employee of the company and be eligible for childcare vouchers. This needs to be done promptly and before Autumn 2015 to ensure that the company can enrol in the old scheme.

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