AT A GLANCE
Tax-Free Childcare is worth up to £2,000 per child per year and pays towards childcare costs at more than 58,000 registered providers including schools, football, art and tennis clubs.
For every 80p a parent puts in, the Government will add 20p – giving, effectively, basic-rate tax back on what is paid, hence the scheme’s name. The scheme can be used to pay for up to £10,000 of childcare per child each year – hence the £2,000 per child saving (this is £4,000 for a child who is disabled).
Parents can get Tax-Free Childcare at the same time as the 30 hours free childcare if they are eligible for both.
ELIGIBILITY
Parental earnings
Both parents must be in work to qualify, and must earn a minimum of the equivalent of 16 hours a week at the national minimum wage and less than £100,000 a year – the same as for the 30 hours entitlement. Self-employed parents with a variable income must show their three-monthly average earnings.
Age of child
The scheme is available to parents of children up to and including the age of 11 (or 16 for disabled children). This is slightly lower than the 15 years of age limit for the vouchers scheme, but is the same for children with disabilities.
Special circumstances?
Unemployed parents can apply if starting or restarting work within the next 31 days, but those on parental leave cannot apply for the child they are on leave for.
If one partner is working, and the other isn’t able to and is in support of Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or Employment and Support Allowance, the couple will be eligible.
It replaces childcare vouchers, which allow parents to pay for childcare from their pre-tax salary. Existing members will be able to continue for as long as their employer runs the scheme.
BUT…
Under Tax-Free Childcare the more you spend, the more you save, which means the system is geared to those with higher incomes.
Official figures reveal that take-up of the scheme has been less than expected. When it was originally announced (in the Budget in 2013), Tax-Free Childcare was expected to cost £0.8bn in 2017-18; in November 2017 the forecast was £37m. So far, £800m has been returned to the Treasury since the scheme began.
HMRC has had to pay out £40,000 in compensation to parents signing up for Tax-Free Childcare for costs incurred due to problems caused by the website’s failure. HMRC has received 3,496 complaints from parents experiencing technical issues, and as of 19 January, the helpline had received 769,015 calls from parents.
FACT research shows that parents earning the minimum wage and working full-time with a three-year-old are just £55 a month better off using the 30 hours scheme and Tax-Free Childcare to pay towards childcare, compared with a high-earning couple working the same hours who stand to save £351 a month.
VOUCHERS
At a glance
Most parents collect vouchers via a salary sacrifice scheme; the tax they would have paid on a proportion of their pre-tax salary is converted into childcare vouchers.
Basic-rate taxpayers can pay for up to £243 of childcare with vouchers each month (equating to £55 a week per parent).
Higher-rate (40 per cent rate) taxpayersget a £28 a week voucher – a maximum annual saving of £625.
Top-rate (45 per cent rate) taxpayers get a £25 a week voucher, making a maximum annual saving of £623.
The limits are the same regardless of the number of children in the family.
The scheme was supposed to close on 6 April, but the Labour Party has won a concession to keep the scheme open to new entrants until 4 October. A petition to keep the scheme running received nearly 120,000 signatures.
Labour has also pledged to scrap Tax-Free Childcare.
Voucher companies have said more than half of households would be worse off without vouchers and that both schemes should be available.
Which scheme is best?
Tax-Free Childcare wins for:
- self-employed people
- couples whose employers don’t offer vouchers, and who meet the eligibility criteria (each with earnings between £120pw and less than £100,000pa; child under 12)
- parents with additional children (childcare vouchers have a cash limit).
Vouchers win for:
- couples where one parent doesn’t work, and the employed parent can get vouchers
- basic-rate taxpayer parents with total childcare costs of £9,336 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare, according to MoneySavingExpert
- higher-rate taxpayer parents with total childcare costs of £6,252 or less. The saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare, according to MoneySavingExpert
- those with an income above £100,000.
