New Tax-Free Childcare scheme

New Tax-Free Childcare scheme to be increased to up to £2,000 per child and extended to all children under 12 within the first year.

Who can take advantage of Tax-Free Childcare?

In the last budget government announced the launch of a new Tax-Free Childcare scheme from Autumn 2015. The new scheme allows parents to save up to 20% of childcare costs, with potential annual savings of up to £2,000 per child. Initially, the scheme is only available to parents of under-fives, but it will probably be extended to under-twelves within the first year of the launch.

Who is eligible?

Around 1.9 million parents will be eligible to claim for Child-care tax breaks to replace the current Childcare Voucher system. The benefit is worth up to £2,000 for each child, which exceeds the maximum saving of around £1,516 under the current system.

Who is not eligible?

Some groups of parents will be ineligible for Tax-Free Childcare, including those with a stay-at-home partner, additional-rate taxpayers, and parents who receive support through tax credits.

Concerned that you can’t wait until 2015?

For parents who already have childcare costs, the Voucher scheme enables you to enjoy tax and NI savings on childcare. It is predicted that many parents will be better off sticking with Childcare Vouchers, however, so please note: you will not be able to join the Childcare Voucher scheme after the Tax Free Childcare scheme is launched in 2015, so you might want to consider applying to join the Voucher scheme now so that you can then make a choice about which is more advantageous to your circumstances when Tax-Free Childcare is launched.

How is Tax-Free Childcare different from Childcare Vouchers?

With Childcare Vouchers, parents benefit from both tax and NI savings, so basic-rate taxpayers typically save 32% and higher-rate taxpayers typically save 42%. The savings are available on childcare costs of up to £243 a month for each basic-rate taxpayer or £124 a month for each higher-rate taxpayer.

Tax-Free Childcare, on the other hand, will only provide savings at a rate of 20%, but these savings will be available on childcare costs of up to £833 a month (or £10,000 a year) per child.

What does this mean?

This means that parents with very high childcare costs will be better off under the Tax-Free Childcare scheme, while parents with more modest costs are better off with Childcare Vouchers.

What you should do?

To find out which scheme is best for you, please contact your account manager. We would advise joining the Voucher scheme now in any case and then making a choice after the Tax-Free Childcare scheme is launched in 2015. If you then decide that the Tax-Free Childcare scheme leaves you better off, then you can switch to the new scheme.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.