Tax-Free Childcare explained

May 3, 2017

AbacusThere are now two ways of getting help with childcare costs; Tax-Free Childcare and childcare vouchers. Which scheme is best for you will depend on how much you earn and if both parents work.

Tax-Free Childcare

Tax-Free Childcare is a new scheme for working families with children under 12 (or 17 if disabled). The scheme has started rolling out for the youngest children and will be extended to older children later in the year. It will give parents up to £2,000 per child towards childcare costs, or £4,000 if a child is disabled.

You can register for Tax-Free Childcare on the Childcare Choices website if either you or your partner work more than 16 hours a week and earn less than £100,000 a year.

The scheme works by encouraging parents (and other family members) to save for childcare in a special account with National Savings & Investments. Parents can save up to £8,000 in the account and for every 80p saved the Government will add 20p.  So it gives you basic-rate tax back on what you pay, hence the name of the scheme.

Unlike childcare vouchers the scheme is not administered by employers so you can use this if you’re self-employed. And you can use the money to pay for registered childminders, nurseries and nannies.

If you currently use vouchers and decide to join the Tax-free Childcare scheme you have three months to tell your employer in writing and you must leave the voucher scheme. Until April 2018 you can switch back if the new scheme doesn’t work for you.

Childcare vouchers

Childcare vouchers continue to be available to new joiners until April 2018 and parents already using vouchers can continue to do so and you only need one parent to work if you use this scheme.

If your employer runs a scheme or organises your childcare you can get up to £933 a year in tax and National Insurance (NI) savings.

They work on the principle of salary sacrifice – you pay for vouchers out of your pre-tax income.

Both parents can use childcare vouchers, so families with two working parents can enjoy double the allowance. You can’t use childcare vouchers as well as Tax-Free Childcare, though.

If you want to use vouchers let your payroll company know that you’re paying part of your nanny’s salary with vouchers.

Your nanny needs to be Ofsted registered to use either of the schemes. If your nanny isn’t Ofsted registered it’s worth paying for, or contributing towards the costs of registration so that you can save on childcare costs.