New tax-free childcare for employed and self-employed parents
Tax-free childcare is a new government initiative which is due to be rolled out from early 2017.
Tax-free childcare is a new government initiative which will replace the existing childcare voucher scheme in April 2018. How does it work? For every 80p you or someone else pays in, the government will top up an extra 20p. This is equivalent of the basic rate tax most people pay - 20% - which gives the scheme its name, ‘tax-free’.
The government will top up the account with 20% of childcare costs up to a total of £10,000 – the equivalent of up to £2,000 support per child per year (£4,000 for a disabled child). How to register? You will need to provide HMRC with an email address, and then HMRC will email you when tax-free childcare and 30 hours’ free childcare is available for your family. That link highlights that 30 hours' free childcare is only available in England but the first question asked is “Where do you live?” which gives options of England, Scotland, Wales and Northern Ireland and allows all applicants to provide email addresses.
Once you have signed up, you will appear on a digital tool. This tool will also let parents search for childcare providers on the tax-free childcare scheme. Each account requires eligibility validation every three months.
When does it start? The scheme will be rolled out gradually, with parents of the youngest children able to apply first.
Who qualifies? In order to qualify both parents (and single parents) in the household must work a minimum of 16 hours per week and not be receiving more than £100,000 each. The scheme is not available if one parent is not working.
The parent is not already getting support through the existing childcare voucher scheme. The scheme is available for children up to the age of 12 (or 17 for children with disabilities).
The scheme is available to the self-employed. To support newly self-employed parents, the government is introducing a ‘start-up’ period. During this, self-employed parents won’t have to earn the minimum income level. Parents and others can pay money into their childcare account as and when they like.
What about current employer-supported childcare? The current Employer-Supported Childcare scheme will remain open to new entrants until April 2018. Parents already registered by this date will be able to continue using it for as long as their employer offers it.
Employers’ workplace nurseries won’t be affected by the introduction of tax-free childcare. Employees do not have to switch to tax-free childcare if they do not wish to. If you are two working parents (basic rate taxpayers) you will be better off with the new scheme only if you spend at least £9,500 per year on registered childcare. Families with part time childcare costs (particularly those with school age children) will generally be better off with the existing childcare voucher scheme.
Can you withdraw money from the account if you want to? If circumstances change, then you’ll be able to withdraw the money you have built up. If you do, the government will withdraw its corresponding contribution.