They’ve been a very long time coming but the new tax-efficient childcare choices are expected to roll out this year.
From a tax point of view, prior to the new childcare options, we had (and will continue to have for a while) two tax-efficient options: employer-provided crèches, and an employer-based childcare voucher system. These options are obviously geared towards employment; self-employed people can’t take advantage of them.
This is widely perceived as unfair, especially in light of the growing number of self-employed people within the ‘gig economy’. The new 2017 choices correct this anomaly. They’re detailed on the government’s new Childcare Choices website, which also covers other forms of child support, including universal credit (these are not considered here). But let’s quickly review the pre-2017 tax-efficient options.
Employer-provided crèches are an exempt benefit in kind and will continue to be so under the new regime for a while. These suit bigger employers. The voucher-based system allows an employer to either arrange for childcare, or give employees vouchers, which are tax-free if you meet all of the conditions. An employer can provide up to £55 each week (£243 per month), free of tax and national insurance (NI), to basic-rate taxpayers.
For higher rate taxpayers, the weekly amount reduces to £28 (£124 per month) and, for additional-rate taxpayers, it’s £25 per week (£110 per month). The voucher scheme is normally offered via a salary-sacrifice arrangement and the government does not appear to have any plans to challenge this set-up.
The new arrivals
So what’s new? The new site starts with a couple of child-support offers for all families in England: 15 hours of free childcare a week for families that have two-year-old children and are on some form of support, such as income support, jobseeker’s allowance or tax credits, with an annual income under £16,190 before tax. You can also get 15 hours of free childcare if you have three- or four-year-olds.
The next two options are only available to working parents, and eligible parents will be able to benefit from both at the same time. Firstly, working families in England with three- or four-year olds can get 30 hours of free childcare a week. Secondly, the tax-free childcare (TFC) scheme is available to working families (including the self employed) in the UK with children under 12.
TFC will be of great interest to working families. So how does it work? Working parents open an online account, and for every £8 they pay in the government will add £2, up to a maximum of £2,000 per child (£4,000 if disabled) per year. Both options have the same eligibility conditions: a parent and any partner must each expect to earn (on average) at least £120 per week. Parents on maternity, paternity or adoption leave, or unable to work because of disability or caring responsibilities, could still be eligible.
A parent or partner who expects to earn £100,000 or more can’t get free childcare or TFC. You can’t use TFC at the same time as childcare vouchers, universal credit or tax credits. You can use it with the 15 and 30 hours schemes. So what will happen to the childcare vouchers? They will remain available to new joiners until April 2018.
Parents already using childcare vouchers can continue to do so after this date, as long as the employer still offers them. The tax and NI exemption for workplace nurseries will also continue. You have a choice, then, if you meet the conditions for both the old childcare vouchers and TFC: you can’t use childcare vouchers at the same time as TFC.
Over time, TFC will replace childcare vouchers and childcare arranged directly by an employer. The scheme certainly achieves the goal of creating more options for the self-employed. Whether parents can get their heads around how the options work together remains to be seen.
Michael Steed is co-chairman of the ATT's tax Technical Steering Group and columnist for Accounting Technician magazine.