From October 2018 new Childcare Voucher schemes ended and were replaced with Tax Free Childcare Accounts but those parents who already had childcare vouchers issued by their employer may continue with them. Parents cannot have both types of childcare subsidy, but some parents with vouchers could be better off switching to Tax Free Childcare Accounts. Here we look at how they work and what family circumstances would determine the best option.
Parents who are employed may sacrifice part of their salary in return for childcare vouchers which are issued by their employer and are tax free. Basic rate taxpayers may exchange up to £55 per week of salary, higher rate taxpayers £28 per week and top rate taxpayers £25 per week*. Each parent may participate in a scheme run by their employer, so two parents may double up the vouchers earned and tax saved, if both employers offer them. Vouchers save the parent up to £933 a year if a basic rate taxpayer, up to £625 for higher rate payers and £623 if paying 45% tax*. A parent changing jobs will lose this option.
Tax Free Childcare Accounts
These are available to the self employed as well as employees, providing both parents work and earn at least £139.52 per week (assuming aged over 25) and below £100,000. It involves the parent opening an account via the government website which enables them to save money for childcare. For every £8 saved the Government add £2 on top, up to £10,000 of childcare per child per year. All parents get a 20% uplift in their own saving regardless of their taxpayer status. Only one parent may open an account for each child. There is no limit to the number of children a parent can register an account for, which includes adopted children but not foster children. Parents receiving universal credit or other working age tax credits may be better off to claim childcare credits under those schemes as they can meet up to 85% of childcare costs.
|Childcare Vouchers||Tax Free Childcare Accounts|
|Eligibility of parent||Employed and employer offers a scheme||Employed and self employed|
|Parents’ earnings||Over £12,500||Both parents minimum £139.52 per week (over 25s), maximum one parent £100,000|
|Child age||Under 15, 16 if disabled||Under 12, 17 if disabled|
|Maximum Tax break||£623 - £933 per parent||£2,000 per child|
In both cases the accounts must be used to provide childcare with an approved provider registered with the scheme. This can include nurseries, childminders, wraparound childcare at each end of the school day, sports clubs and playschemes. Childcare Vouchers can be used to pay for tuition, whereas tax free childcare accounts cannot.
Which is best?
Parents of older children will benefit from retaining childcare vouchers, especially if these are used to pay for extra curricular tuition. Larger families would benefit from Tax Free Childcare accounts as each child can gain up to £2,000 of subsidised childcare with no limit on the total.
Families where only one parent earns £139.52 or more per week (over 25s) would not qualify for Tax Free Childcare Accounts but the working parent could use Childcare Vouchers if their employer offered them.
Parents where one is earning over £100,000 are also excluded from Tax Free Childcare Accounts. However, they can restore their eligibility by making pension savings, which reduce the income which counts towards this.
For every £1 paid into a pension, the saver would receive tax relief at up to their top income tax rate, restore their personal income tax allowance where income is reduced within the £125,000 to £100,000 range (a full personal allowance means the first £12,500 of income is tax free) and make themselves eligible for up to £2,000 of subsidised childcare per child, giving an effective rate of tax relief of over 60% on their pension savings.
Which scheme is best will depend on personal circumstances, some parents could be better off with Tax Free Childcare Accounts and those receiving vouchers who change jobs will lose them, so may need to switch then.
*Unless joined the scheme before 6 April 2011 – could have £55 if joined prior to then.
*Unless joined scheme before 6 April 2011.
Director of Public Policy
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