Tax-free childcare – who gets it and when is it available?

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The government’s new tax-free childcare will be rolled out from April 28th. But how will the tax-free childcare work and who gets it?

What is tax-free childcare?

The government is introducing a tax ‘subsidy’ on childcare costs, which will be rolled out from April 28th this year.  The government is fond of describing this as ‘tax-free childcare’, which is why I’ve called it this, but it isn’t really tax free. This is how it will work:

  • There will be a 20% tax break. Parents will be able to claim 20% of their childcare costs up to £10,000 for each child.
  • The scheme will cover children up to the age of 12. It will be available for children up to the age of 17 if they have disabilities. The tax-free childcare scheme will initially be available for children from birth to five years old.
  • The tax break will be available to parents who are working. It will be available to parents who work, who don’t claim tax credits or Universal Credit,and don’t earn more than £100,000 (each parent). Each parent will have to work an equivalent of 16 hours a week earning £120 a week each or more. Both self employed and employed parents will be able to claim the tax-free childcare.
  • You can use it to pay official providers of childcare. You can’t use it if you’re paying your parents to look after your children or if you’re using friend or neighbour. The childcare provider must be Ofsted registered, if they’re in England, CSSIW in Wales or the Care Inspectorate in Scotland.

How the scheme will work

If, for example, you have a child and pay £400 a month for his or her nursery fees, once the new tax break is introduced in April, you could set up an account with a childcare voucher provider, and pay in £320 a month. The government would top this up with £80.

SAVVY TIP: The tax break will be worth 20% of your childcare costs, up to a limit of £10,000 a year in childcare fees or £833 a month.

  • The account will be operated online: The government says there will be extra help for parents who don’t have internet access. Other family members (apart from parents) will be able to pay into the account.

The account will be delivered by HM Revenue & Customs, alongside National Savings & Investments. This means that parents won’t have to worry about finding a childcare tax relief account provider, although they can choose who provides the childcare (as normal).

Parents will have to report any changes every three months. They won’t have to tell HMRC about any changes in ‘real time’, but will have to do this four times a year.

Who won’t be covered by the scheme

Parents who have children aged over 12, or 17 if they are disabled won’t be able to claim this tax break. Neither will households where only one parent works — unless it’s a lone parent household.

Childcare vouchers

The government wants to replace the current system of childcare vouchers that are available via your employer, and offer tax breaks to more parents.

  • Employer-based childcare vouchers are worth up to £55 a week or £243 a month. This compares to £166 a month for the new tax-free childcare scheme.
  • Childcare vouchers are only available from employers that take part in the scheme. One of the criticisms of employer-based childcare vouchers is that you’re only entitled to them if your employer offers them — and many don’t.
  • Self employed parents can’t use employer-based childcare vouchers to help pay childcare costs.

Employer-based childcare vouchers provide help for childcare costs up to 1st September following your child’s 15th birthday (or 1st September following their 16th birthday if they are disabled).

SAVVY TIP: Anyone who’s already receiving employer-based childcare vouchers will be able to continue receiving them. If you prefer, you can switch to the new scheme from the spring of 2017.

Useful links:

You can get emails about the new tax-free childcare scheme and when it launches in your area by signing up on the Gov.uk website.

Photo: Morguefile

Related articles:

Employing a nanny – how to sort out tax painlessly

Childcare options in your home; finding an au pair or nanny

State pensions and women; your state pension when you’re bringing up children

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