By Phil Moss, tax partner
If you pay for childcare and are not already using childcare vouchers, you may be missing the potential to save £1,000s a year in tax. Paying for your childcare from pre-tax salary can make a huge difference.
If you’re not already taking advantage of these vouchers, you should check them out urgently as the current scheme changes in October 2015 under 2014 legislation. That may not be such bad news for many. The new scheme will be open to many more people (including the self-employed where previously it has not been) but some families will undoubtedly be better off opting to stay with the current scheme known as Employer Supported Childcare.
Pros and cons
Current scheme - Childcare Vouchers
- Allows parents to salary sacrifice in exchange for vouchers for children up to age 15
- Vouchers worth up to £55 per week or £243 per month
- Tax and NI savings can add up to £933 per year (higher earners can save up to £1,370 in schemes established before 6 April 2011, or £623 otherwise)
- Total saving can be almost £2,000 per year as both parents can claim
- If you are already a member, you can continue to use this scheme until your child reaches 15 – but only if you stay with the same employer (new scheme supports children only up to age 12)
- Employees can continue to sign up until the scheme is frozen later this year
- You will not be able to claim under both schemes at the same time so you need to make a choice
- If you are a working couple with one child, paying around £5,000 per year for childcare, you will be worse off under the new scheme but if you have two children and spend £5,000 on each, you will be better off
New scheme - Tax-Free Childcare
- Designed to support children aged under 12
- Is not available where either parent earns more than £150,000 per year
- allows parents to open an account online from Autumn 2015 to pay registered childcare providers
- Government adds 20p for every 80p that the parents put in, up to a limit of £10,000 per child (raised from £6,000 previously) so, if you claim the full £10,000 it will actually cost you £8,000 and be topped up by a government subsidy of £2,000
- Quarterly reconfirmation of parental status is required
- Eventually, there will be no support for parents of children aged between 12 and 15 except where the child is disabled
Who will benefit from the new scheme?
Many working parents will benefit and many won’t be eligible. Some will be able to claim more than under the existing rules and some will be worse off. Both parents in the household must be working in order to qualify so if you are the only wage earner in your household, you may be better off under the existing scheme.
As an example, a working couple with one child may be between £134 to £754 a year better off if they spend the maximum £10,000 but if they only spend £5,000 per year, they will be worse off. A working couple with three children will be up to £4,754 better off and a single parent with two children can claim up to £3,377 more a year.
In general, those with lower ongoing childcare costs (i.e. a few days per week or periodic childcare costs during school holidays) will often be better off in the existing scheme. It’s important to examine the schemes and do the calculations to decide which scheme will work better for you and your family. Employees who will not be eligible for Tax-Free Childcare should examine whether they can join an existing employer scheme as soon as possible. Employers who do not offer a childcare voucher scheme should consider offering one now as the fees charged by voucher companies should be less than the employer’s NI savings.
To discuss any of these issues, please do email me.