Since this article was published, the government have announced Tax-Free Childcare will be launched in early 2017.
The Government used the 2013 Budget to announce that a new tax-free childcare voucher scheme would be introduced in Autumn 2015. Tax-free childcare was expected to provide parents with tax savings of up to £1,200 per child each year.
Following a consultation exercise, the Government has published more details about the tax-free childcare scheme, including an announcement that the scheme will be administered by NS&I rather than by existing childcare voucher providers.
The level of childcare costs covered by the new scheme has been increased since the original announcement. Initially, a 20% tax break was expected on the first £6,000 of childcare costs, providing savings of up to £1,200 per child. The scheme has now been extended to cover annual childcare costs of up to £10,000, providing savings of up to £2,000 per child.
Employers will be able to continue to set up a childcare voucher scheme until tax-free childcare is launched, meaning there is still an opportunity for employers to enjoy the National Insurance savings which childcare vouchers provide. Parents will be able to sign up for childcare vouchers until Autumn 2015 and they can then continue to order vouchers beyond Autumn 2015, for as long as their employer continues to run the scheme. Some existing scheme members will choose to switch to the new scheme from 2015, as in some cases this will provide higher savings.
The new scheme will initially only be available in respect of children under 5, although there are plans to make it available for all children under 12 within one year.
The winners and losers
- Tax-free childcare will provide higher savings for many parents, including the self-employed and those with high childcare costs. However, some parents are better off under the existing arrangements.
- Parents who sign up to the current childcare voucher scheme will be able to remain in the scheme, so they will not be disadvantaged by the proposed 2015 changes. However, if they move to a new employer after Autumn 2015, they will be considered to have left the current scheme and be forced to switch to the new arrangements.
- Some parents will not be ready to use childcare vouchers until after the new scheme starts. In some cases, these parents will receive lower savings from the new arrangements than they would have had under the current scheme.
- The new scheme will not be available to families where either parent earns over £150,000, whereas the current scheme allows high earners to enjoy tax savings at the same level as basic-rate taxpayers.
- The new arrangement will not provide any National Insurance savings (currently worth up to 12% for basic-rate taxpayers and up to 13.8% for employers). For some employers, this will be a significant loss, which could have a knock-on effect on the amount which they are able to spend on other employee benefits. Local authorities and NHS Trusts are among the employers who will be hit, potentially leaving a hole of hundreds of thousands of pounds in their budgets.
- In general, parents will only be better off under the new scheme if their childcare costs are higher than the figures shown in the table below. Parents with lower childcare costs would be better off with childcare vouchers.
| Family circumstances | Level of monthly childcare costs after which tax-free childcare becomes the better option |
|---|---|
| Single parent, basic-rate taxpayer | £ 389 |
| Single parent, higher-rate taxpayer, joined childcare vouchers before 6th April 2011 | £ 510 |
| Single parent, higher-rate taxpayer, joined childcare vouchers after 5th April 2011 | 260 |
| Couple, both basic-rate taxpayers | £ 778 |
| Couple, one basic-rate taxpayer, one higher-rate taxpayer who joined childcare vouchers after 5th April 2011 | £ 649 |
| Couple, both higher-rate taxpayers who joined childcare vouchers after 5th April 2011 | £ 521 |
What action should parents take?
Parents who aren’t already using childcare vouchers should ask their employers to set up a scheme now, rather than waiting until the new scheme is launched in 2015. Employers enjoy National Insurance savings from the current scheme, so it is in their interest to set up a scheme before the 2015 deadline.
Will there still be a role for employers in the new scheme?
Although the new arrangements take the onus away from employers, the Government hopes that employers will still have a role to play. Many parents use childcare vouchers as a way of budgeting for childcare costs and appreciate the benefits of their childcare payments being taken direct from salary. Employers will be able to support their employees by gradually replacing their existing salary sacrifice schemes with voluntary payroll deduction schemes. Although employers will no longer benefit from National Insurance savings, providing easy access to tax-free childcare will still allow them to enjoy the benefits of better staff engagement and higher morale.
Useful links
Tax-free Childcare Consultation