As we near the school summer holidays, parents will be busy planning childcare for the time they’re not with their youngsters – a costly and stressful situation for some. Many parents aren’t aware of the range of support that is available for childcare costs in the school holidays. Lots of clubs and camps are registered providers for government assistance.
In 2018, Tax-Free Childcare replaced the Childcare Voucher Scheme but parents already using vouchers were able to continue if their employer still offered the scheme. For some parents, it remains beneficial to continue on this scheme and for others it is better to use Tax-Free Childcare. Let’s examine the ins and outs of both options.
Tax-Free Childcare
Whilst Childcare Vouchers are processed through a company’s payroll, Tax-Free Childcare is a government scheme that works through an online account accessed via the HMRC website. If both parents earn more than an average of £131 per week and less than £100,000 per year, the government pays £2 for every £8 parents pay into the scheme, up to a limit of £2,000 per year.
The money can be used for thousands of registered childcare settings such as nurseries, childminders, holiday and after-school clubs for children up to 12 years old (or 17 for disabled children). Parents must sign into their online account every three months to continue receiving the government contributions. More details on Tax-Free Childcare are available here.
Childcare Vouchers
Whilst not accepting new participants, the voucher scheme is still in operation for those that registered before 2018. Parents pay for childcare via salary sacrifice which means they pay out before tax. As long as the employer continues to offer the scheme, parents can claim vouchers for children up to 15 years old. Childcare vouchers are worth up to £55 per week or £243 per month, with a tax and National Insurance saving of £933 per year for each basic rate taxpaying parent.
Which scheme is best?
Many parents haven’t switched from Childcare Vouchers to Tax-Free Childcare and with good reason, the newer scheme isn’t the most favourable for some families. Tax-Free Childcare is the only route for self-employed people or couples earning less than £100,000 each as they wouldn’t be eligible for Childcare Vouchers. Those with high childcare costs for multiple children benefit more as the assistance increases with the number of children whereas Childcare Vouchers are limited.
Childcare Vouchers are a more favourable option for couples where only one parent works for a scheme-registered employer and the childcare costs are less than £9,336 for a basic-rate taxpayer (the threshold where savings with Childcare Vouchers are greater than with Tax-Free Childcare) and £6,252 for a higher-rate taxpayer. Childcare Vouchers is the only scheme available for couples where one or both earn £100,000 or more.
Other considerations
As salary sacrifice is effectively a reduction in earnings, Childcare Vouchers can impact financial elements that rely on the salary amount, like pension contributions and maternity pay, for instance. However, the gain from the vouchers is likely to outweigh any reduction elsewhere.
If parents decide to move from Childcare Vouchers to Tax-Free Childcare, they cannot return to the old scheme so it’s important to understand all the implications and benefits of both types of assistance.
Like all tax schemes and systems, the devil is in the detail, so if you’re confused, consult the experts at CRM Oxford on 01865 379272.
