Changes to Tax Free Childcare - what you need to know

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Later this year, childcare voucher schemes offered through employers will no longer be open to new entrants as the government introduces their Tax-Free Childcare (TFC) scheme for families across the UK.


The rationale behind this change is to help more families meet the increasing costs of childcare. Government estimates suggest that five times more parents will now be eligible including self-employed parents and employees who never had access to a childcare voucher scheme through their employer. However, this inclusivity may come at a cost to many families currently benefitting from Employer Supported Childcare (ESC). 


So how will the government's new initiative work?

Well, although the core elements of the scheme have been worked out, there are still a number of Is to dot and Ts to cross.


The new initiative will see the role of the employer removed and from Autumn 2015, working parents will be able to buy vouchers online (held within an account run by National Savings & Investments) to help meet the cost of their childcare arrangements. For every 80p parents spend, the government will add 20p. The maximum claim per child is £10,000 per year and there is no limit on the number of children that can be claimed for. In the case of a parent claiming the maximum, the government’s subsidy will be £2,000. The vouchers can only be used to pay for Ofsted-regulated childcare, not for care provided by friends or relatives.


Parents will only be able to claim for children up to the age of 12, rather than 15 years old as allowed under ESC and the new scheme will operate on a ‘quarterly entitlement’ basis. Once eligible and in the scheme, parents will continue to be entitled to support for three months, regardless of any changes in circumstances. Money can be paid in to the online account as a lump sum or parents can make monthly payments. Every quarter, parents will need to re-confirm their eligibility online, a task one can imagine becoming quite laborious over time.


Both basic and higher rate income tax payers will qualify for the same amount of government help, however additional rate tax payers will be ineligible as will those parents who are in receipt of universal credit or do not work. The scheme is available to anyone working a minimum of eight hours a week on the National Minimum Wage (NMW).


What will it mean to parents currently claiming vouchers through Employer Supported Childcare (ESC)?

As mentioned earlier, ESC schemes will close to new joiners later this year. For those already in these schemes, they will be ‘grandfathered.’ Families cannot use both schemes at the same time, therefore both parents would need to leave ESC if one parent opts to join TFC. Parents will be able to join TSC at any time, however once they do, there is no going back.


How does the new scheme compare to the old scheme?

Perhaps the most important question is which scheme is better and what parents should do whether they are currently in receipt of ESC. Well, unsurprisingly, there is no definitive answer to this question as there are a number of factors to consider; number of children, annual salary, parents working situation and of course, current childcare costs. A general rule would appear to be that those on higher salaries with more children stand to gain by joining the new scheme. Those on lower incomes with perhaps only one child may find ESC provides better value.


Parents are encouraged to think carefully about what is better for them prior to making any decision. Independent research has suggested that of parents currently receiving ESC, less than 20% will be better off if they were to switch to TFC. If they are eligible to join ESC now, it may be worth parents doing so (if only to claim £10 per month) so that come the autumn, they are in a stronger position and have a choice between the schemes rather than having only one option to meet the costs of childcare.


Related article:  Tax-free Childcare: 10 things parents should know

Should you have any questions regarding these changes, please feel free to contact the Flexible Benefits team at 020 7614 1000.

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