The future of tax-free childcare

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In this year’s Budget tax-free childcare was announced as the successor to employer-supported childcare. It sounded like a good deal, but employers and some employees might do well to stick to the current scheme, why?

Childcare tax schemes recap

Tax and NI breaks for childcare have been around for quite a while, but currently they’re only available via employer-run schemes. However, the new tax-free childcare (TFC), to be phased in from April 2015, will be available to virtually all working parents who pay for childcare. However, it won’t be a straight swap; parents and employers will have options.

Latest advice

The numbers bandied about by the Chancellor in this year’s Budget suggested that TFC would be more generous to parents than the current system, but that employers might lose out. However, HMRC’s recent consultation paper explains that, in a wide variety of situations, the current scheme is more generous and employers can continue to use it for quite a few years to come (see The next step ).

Why should employers continue?

The advantage of the existing scheme is that employers can offer tax and NI-free childcare payments or vouchers instead of parents paying these costs out of their taxed salary. Obviously, this benefits mums and dads, but the employer also gains by not having to pay employers’ NI on the value of the vouchers/payments. It’s therefore in an employer’s interest to keep the current scheme running as long as possible.

Tip. Employers can continue to accept staff into their scheme until 6 April 2015. To maximise NI savings they should encourage eligible employees to sign up before then (see The next step ). What’s more, they can stay in the scheme until they cease to become eligible or choose to switch to the new one, i.e. TFC.

Why should employees continue?

The headline figures show employees will be entitled to up to £1,200 per year, per child, but this represents the maximum under TFC. In practice, many parents will be entitled to less because of certain terms which apply to the new scheme but not to the existing one:

until April 2016 TFC will be open only to parents with children aged under 5. This limit will rise each April by one year until it applies to children aged twelve and under

the maximum combined tax and NI saving is 20% of the childcare costs.

Rule of thumb calculation

Couples will be better off under the new scheme where they are basic rate taxpayers with two or more children that qualify for TFC and their annual childcare costs are £9,330 or greater; £6,250 for higher rate taxpayers. The position is different again for single parent households.

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