Our editor Victoria Galligan looks at the big changes ahead for tax-free childcare and asks: are some parents going to be left worse off?

Parents have been entitled to a voucher scheme to make savings on childcare since 1989. But many parents are missing out for two reasons – because they don’t know they are entitled to them and because the scheme is about to change.

The Government had previously outsourced the administration of childcare vouchers to private companies, who would liaise with employers and parents to organise the payments. In early 2017, the Government’s Tax-Free Childcare scheme (TFC) was rolled out. With TFC, the Government pays roughly £2 for every £8 parents pay for childcare and this is capped at £2,000 a year per child. From April this year, TFC will be the only option for parents. Childcare voucher companies will continue to run old accounts but cannot take on new clients. However, existing users can continue to pay for the vouchers until they end their employment with their current employer.

Some childcare experts say the changes coming up in April will leave parents worse off. Here, we take a look at the facts and find out if parents need to act before the April deadline.

Who is entitled to get help with childcare payments?

In short, most working parents. The amount you put into the vouchers scheme, usually through salary sacrifice, is not taxed nor is national insurance (NI) taken. With TFC, you get 20% off childcare costs. The sacrifice arrangement should not cost your employer much and in fact the saving they make on NI should leave them better off. With vouchers, self-employed parents cannot qualify. And if either parent earns over £100,000, the family cannot qualify for TFC.

What can parents spend the money on?babies nursery childcare tax

For vouchers and TFC, the salary which is sacrificed can be paid to any Ofsted-registered childcare provider who has agreed to be part of the scheme, including nurseries, before and after-school clubs, holiday clubs, nannies and childminders. The beauty of the schemes is that childcare providers set their own prices, so they are not losing out by having their fees replaced by a set hourly payment from the Government – as with the 30 hours free childcare arrangement. This means they are more likely to sign up for the scheme.

How much can parents save?

Here’s where the difference between vouchers and TFC comes in. With vouchers, basic-rate parents sacrificing the maximum £55 per week (£243 per month) can save up to £933 per year in tax and NI contributions. Only one parent must work although both parents can apply if working, meaning a family can save up to £1,866 per child aged up to 15 (or 16 if the child is disabled). If your childcare costs exceed the amount paid in salary sacrifice, you must pay the difference from your net wage.

Since 2011, the set limit of how much salary a parent can sacrifice with the vouchers scheme has depended on their tax bracket:

  • Basic rate: parents can pay in up to £55 a week (£243 a month) – an annual saving of £930
  • Higher rate: parents can pay in up to £28 a week (£124 a month) – an annual saving of £624
  • Additional rate: parents can pay in up to £25 a week (£110 a month) – an annual saving of £590

With TFC, the limit which parents can spend is higher so they can potentially save £2,000 a year in tax and NI per child. Bear in mind, TFC stops when the child is 11 (or 17 if the child is disabled). So most parents of secondary school children will lose out. In addition, with TFC both parents must work if they are a couple, although self-employed parents can apply. Also if your childcare costs are lower, the saving of tax and NI is more on the vouchers scheme than on TFC. If you spend a lot in childcare and you're a higher- or additional-rate taxpayer, you may be better off with TFC.

So which option is best for parents?

This is dependent on many factors: earnings, childcare costs, other benefits and the number of children being just a few. The best way for parents to make a decision before April is for them to use an online calculator such as this one at the Employers For Childcare website, which states, “We urge all parents who are considering making a switch to TFC to contact us before they do so. In some cases, parents will be better off using childcare vouchers, accessing tax credits or universal credit, or using a combination of these. To January 2018, 66% of 5,115 callers to our Family Benefits Advice Service were better off on childcare vouchers or tax credits, or a combination of both, rather than TFC.”

One thing is certain: parents haven’t got much time left to make a decision.

Categories