The tax-advantaged arrangements for childcare are about to change. Currently, parents who are employed are able to claim a childcare tax credit or to buy childcare vouchers, with the cost being deducted from their salary before tax is charged. However, no such scheme is available to the self-employed.
This deficiency is being addressed in a new scheme which is to be introduced next year which will offer savings per child, rather than per parent.
Basic rate taxpaying parents who use the voucher scheme can spend £243 per month on childcare regardless of the number of their children, representing a saving of £930 per year.
Under the new scheme, the government will pay 20% of the childcare costs up to a maximum of £2,000 p.a.. But if either parent earns more than £100,000, both parents will be disqualified. Tax-free childcare is also not available to parents receiving tax credits or universal credit.
The voucher scheme will close to new entrants in April 2018 but may be maintained by some employers, and some employees may be better off under this scheme. In particular, it is a condition of eligibility for the tax-free childcare scheme (but not the voucher scheme) that both parents must be working at least 16 hours per week and paid at least the national living wage.
Basic rate taxpayers who spend less than £9,336 per year on childcare will be better off with vouchers, as will higher-rate taxpayers who spend less than £6,252 per year. However, those with large families who spend more on childcare will benefit from the fact that the maximum benefit of the tax-free childcare scheme is £2,000 per year, compared with £930 for the voucher scheme.
Parents currently using the voucher scheme will be able to switch to the new scheme next year if they wish to do so.
For more information, please contact one of our advisers.