There’s good news for parents who are self-employed. The new tax-free childcare scheme that will be launched in early 2017 now makes it easier and more accessible for more parents to take advantage of tax-free childcare.
The current options
There are three common systems currently in place to provide childcare in England, all of which are dependent upon an employer. Employers typically offer: childcare vouchers, workplace nurseries, or contracted childcare as options to their employees.
With these options, employees maximise their savings through the use of salary sacrifice.
With childcare vouchers, employers can currently provide up to £55 per week (£243 per month). The employer-provided vouchers are free of both tax and NI provided your employment earnings are not more than the higher rate 40% threshold.
If your earnings are above this threshold, the weekly amount reduces to £28 (£124 per month), it reduces further for additional rate (45%) taxpayers; to £25 per week (£110 per month).
The vouchers can also be saved up and used at a later date.
This amount is per person, so if both parents work and receive childcare vouchers, this can add up to £5720 in total for a full year.
The new childcare scheme
When the new scheme is implemented, it will be available to all individuals who make between £115 per week and £100,000 per year. Parents with children up to the age of 12, or 17 for those with disabilities, will be eligible.
It is designed to be more flexible than the current options available, as it accommodates parents who decide to work part time, self-employed, on sick leave, or working from home as well as full-time employees.
How the new scheme will work
After it is launched in 2017, you will be able to sign up online by opening an account on GOV.UK. It will be rolled out starting with parents with the youngest children being able to register first.
If you have children of different ages, you will be able to register for all as soon as the signup opens for the age of your youngest.
The government is adopting an 80/20 approach. This means that, for example, for every £8 that is put into your account, the government will top up the additional £2, for up to £10,000 per year (£2,000 per child, and £4,000 if the child is disabled).
Are there any downsides?
While the new scheme is considered tax-free, since the government will be topping up by 20% (the basic tax rate), there are no National Insurance savings. This means that for employers cannot save on NI by offering salary sacrifice schemes, their employees who choose the new scheme will also lose their NI savings.
To better illustrate the differences between a current scheme and the new scheme, we compare the different amounts for an employed couple.
Below is an outline of how the current voucher system works, using the example of a couple where one is a basic rate tax payer and the other is a higher rate taxpayer and their employer operated salary sacrifice:
Basic Rate Taxpayer
£55 per week x 52 weeks = £2860
Tax Saved £2860 x 20% = £572
Employee NI saved £2860 x 12% = ££343.20
Total employee tax and NI Saved £915.20
Employers NI Saved 13.8% = £394.68
Total savings £1309.88
Higher Rate Taxpayer
£28 per week x 52 weeks = £1456
Tax Saved £1456 x 40% = £582.40
Employee NI saved £1456 x 2% = £29.12
Total employee tax and NI Saved £611.52
Employers NI Saved 13.8% = £200.93
Total savings £812.45
The maximum vouchers for the couple would be £2860 + £1456 = £4316
The saving for the couple is £915.20 + £611.52 = £1526.72
The Employer saving is £394.68 + £200.93 = £595.61
The maximum is £10,000 in childcare saving £2,000 (assuming that the child is not disabled, in which case it will be more).
The couple will save more with the new scheme if they pay in more than £7633.60
Choose the best option for your needs
You do not have to switch to the new Tax-Free Childcare if you do not wish to. Employer-Supported Childcare will continue to run. The current scheme will remain open to new entrants until April 2018, and parents already registered by this date will be able to continue using it for as long as it’s offered by their employer.
If you do choose to switch to the new scheme and change your mind later on, you will be able to withdraw any funds that you have put into the account.