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Under the Tax-Free Childcare scheme, eligible families are provided up to £2,000 free for every child in the family. In this article we shall deal in detail with the scheme which was introduced in April 2017 and replaced another scheme known as Childcare Vouchers.

One noteworthy fact about this scheme is that close to 1.5 million families are eligible for Tax-Free Childcare scheme. However, this benefit is not being claimed by more than 250,000 people, possibly because of lack of proper knowledge and some underlying problems with the structure. On the brighter side, majority of the issues associated with this scheme has been sorted out which means you should take a fresh look at this scheme which offers a significant amount per year as childcare costs.

Tax-Free Childcare Scheme And Childcare Voucher Scheme

Tax-Free Childcare Explained in Detail

The Tax-Free Childcare scheme is backed by the Government where the Government bears 20 per cent of the childcare costs. What it means is that you need to open a centralised account and for every 80 pence that you spend on your child, the Government will contribute 20 pence. You can then pay your childcare provider from money accumulated in the Tax-Free Childcare account.

Read More: Tax Avoidance Schemes List

Determine if You Even Need to Pay for Childcare in the First place

Children aged between 3 to 4 years are eligible for free childcare in the UK. In England, each child gets on an average 15 hours a week for 38 weeks and it doubles for household where both the parents work and each earn an average of at least £131 a week. In Scotland it is 16 hours a week and for Wales it is minimum of 10 hours a week and maximum of 30 hours in some parts. Inn Northern Ireland it's up to 22.5 hours a week.

Universal Credit Childcare Help

If a single or both member of the household is working and they pay for childcare, then they can reclaim 85 per cent of their childcare costs through universal credit. The rules are a bit on the complicated side, but basically if your family income falls below £40,000/year, you can make use of universal credit calculator to check your eligibility. Households with more than £40,000/year income under certain circumstances may also find themselves eligible for this scheme if they have high childcare costs. The amount you get depends on your circumstances but on average you can expect depends on your circumstances, but you can expect up to £646/month for one child, and up to £1,108/month if you've two or more children.

Tax-Free Childcare Offers up to £2,000 per Child Each Year

As per the Tax-Free Childcare scheme, every 80p you put into your Tax-Free Childcare account, the state will on its own part add 20p. It can be best understood with the help of an example. Say your childcare bill was £500/month. You will be required to bear 80 per cent of the cost which comes up to £400/month. The state has to bear 20 per cent of it which comes to £100. That means your total expenditure at the rate of £500/month will be £6,000. The Government picks up 20 per cent of it which means £1,200 which in turn reduces your annual childcare expenses to £4,800.

Another very important thing to remember is that the Government support for the full year will not exceed £2,000. For example, if your childcare bill per month is £1,000. In such a scenario you pay £800 per months and the Government £200. The maximum amount of £2000 thus will be reached in 10 months and then you will be on your own.

All Eligible Workers Inclusive the Self-Employed are Eligible for the Scheme

Tax-Free Childcare is open to all qualifying parents. This was not the case with now abolished Childcare Vouchers as only the people who signed up for it were eligible and that too in workplace which offered them.

Self-employed people earlier could not previously benefit from such Government schemes to cut the cost of childcare. Tax-Free Childcare scheme does away with this anomaly as it is open to all self-employed people, along with those who are working but not availing Childcare Vouchers to benefit from the 20 per cent support being provided by the Government.

However, please note that in order to qualify as a self-employed for this scheme both you and your partner (if you have one) have to work. In other words, you will not be eligible to take advantage of the 20 per cent tax perk given by the Government if your partner does not work. Although you can avail all the benefits of tax free childcare scheme if you are a single parent.

The Child Must be 11 or Younger

The scheme is available for parents who have children 11 years old or less. The maximum age limit extends to 17 in case of children with disabilities. In Childcare Vouchers scheme, the maximum age limit for children was 15 and 17 in case of children with disabilities.

Both Partners Must Work and Earn at Least £131 a Week

To qualify for the Tax free childcare scheme, both you and your partner (if you have one) should be working and earn not less than £131 a week from April. Also, to qualify for this scheme, each parent’s yearly income should not exceed £100,000 a year.

And now one important question arises. You are self-employed (a taxi driver for example) ad your weekly income varies from week to week and you don’t fulfil the £131 a week criteria. Under such circumstances, will you be then disqualified for the scheme? The answer is ‘NO’ as long as your three-monthly average meets the £131 a week minimum.

Also Check: DNS Weekly Take Home Wages Calculator

Moreover, you are exempted from minimum income requirement if you have been self-employed for a duration less than one year.

Frequently Asked Questions (FAQs) Related to Tax free childcare scheme

Q 1: Am I eligible for Tax-Free Childcare during maternity leave?

If you're on paid and unpaid statutory maternity, paternity or adoption leave, you will be eligible for tax free childcare scheme because as per the law you are still working. Another important thing to remember is that you cannot avail of the scheme for the child for whom you have taken the leave; but you can derive benefit from this scheme for other children you have.

Q 2: Can we get Tax-Free Childcare if one of us isn't working?

As mentioned above, both the partners need to be working to avail of tax free childcare scheme. However, you'll still be eligible for a childcare tax relief if one of the partner is working and the other is not, and receives any one of the following mentioned benefits:

  • Incapacity benefit (both short and long term)
  • Allowance for severe disability
  • Carer's allowance
  • Contribution-based employment and support allowance
  • National insurance credits (because of partial or full inability to work.

Q 3: Am I eligible for Tax-Free Childcare if I am sick?

Yes, people on paid sick leave are eligible for tax free childcare scheme.

Q 4: Can I get Tax-Free Childcare if I'm about to start working?

If you are currently not working but plan to start work in the next 31 days, you are eligible to apply for Tax free childcare scheme.

Q 5: Ensure your childcare provider's registered with a regulator

Childcare could be any breakfast club, nursery, playgroup, nanny, etc. This though is not as important as the fact that your provider is registered with a regulator such as Childcare Register, Ofsted or the Early Years Register to count as childcare under the tax free childcare scheme. This though is not wholly sufficient as you also need to ensure that the childcare provider is registered with the Tax-Free Childcare scheme before you open your Tax-Free Childcare account.

For more information, just log into your account and you will get all the information about all the registered providers. If your provider is in the list then you can make payments to the provider's bank account through the BACS system.

Q 6: How the Tax-Free Childcare scheme works & how to sign up?

If you eligible for the tax free childcare scheme, you need to follow the below mentioned instructions.

Any parent with more than one child should sign up immediately for the scheme as soon as the youngest child reaches the eligible age.

First and foremost, you need to open your childcare account by visiting the government site https://www.gov.uk/apply-for-tax-free-childcare. To avail of the scheme, you will have to provide your details and that of your partner too if you have one. You have to furnish information about

You can pay your provider with money from your account once the money is shown as ‘available funds’ and it normally takes three days to reach the childcare providers’ account. Only one parent is allowed to open the childcare account though both are eligible to use it.

The Government will put up its own share the same day. What it means is that if you put £80 on Monday, the Government will put in its share of £20 which will make it £100. In tax free childcare scheme, you also get the facility to spread the cost of childcare, i.e. pay extra in some months to cover for the extra childcare you may encounter in some other months. However, please remember that top up will not exceed £500.

Also, every three months you are required to 'reconfirm' your eligibility. You can do so by logging in through your childcare service account and ticking the box stating that your circumstances remain the same.

Q 7: Childcare Vouchers and Tax free childcare scheme: which is a better option for you?

Childcare Vouchers scheme refused accepting new applicants from 4 October 2018. It has been replaced by tax-free childcare scheme. However, if you were availing of the vouchers before the scheme closed, you can still use them provided you are staying with the same employer and the employer offers it.

Some experts opine that tax free childcare scheme is better than Childcare vouchers scheme. However, you need to conduct some research on your end to find out which is better suited to you as per your own circumstances. You need to display extra caution as you cannot go back to Childcare voucher scheme once you opt for Tax-Free Childcare.

Tax-Free Childcare is better when:

You have more than one children and the childcare costs are high. This is because the child support goes up with additional children. In contrast, Childcare voucher scheme is per parent and does not take into consideration the number of children you have.

Tax free childcare scheme is the only option for self-employed people or couples who earn less than £100,000 each, as they are not eligible for Childcare voucher scheme.

Childcare Vouchers is better when:

Childcare voucher is the only option for couples where one of the partner does not work as both the partners need to work in order to be eligible for the scheme. There is an exception in case of tax free childcare scheme if the other partner receives a qualifying benefit. In case of Childcare Vouchers only one parent needs to work.

Childcare voucher is better option for basic-rate taxpayer parents with total childcare costs of £9,336 or less as the total savings they make will be more in comparison to Tax-Free Childcare scheme.

Childcare voucher is better option for Higher-rate taxpayer parents with total childcare costs of £6,252 or less as the total savings they make will be more in comparison to Tax-Free Childcare scheme.

Childcare voucher is better option for higher earners as well. Anyone earning £100,000+ (or in a couple where one earns £100,000+) isn't eligible for the Tax-Free Childcare scheme, while Childcare Vouchers places no such limitations on earnings.

Q 8: Here’s an example of how it works in practice.

For low childcare user

John Singlefellow and his wife bear £500 per month as childcare cost. As basic-rate taxpayer parents using vouchers, they would only have to pay £344 – a saving of £156.But in case of tax free childcare scheme, they have to bear 80 per cent of the cost which comes up to £400. They save £100 which is £56 less than childcare vouchers.

And in case of Higher-rate taxpayer parents, it would cost £396 – a saving of £104. But in case of tax free childcare scheme. And if they used the new Tax-Free Childcare scheme, they have to bear 80 per cent of the cost which comes up to £400. They still save £4 less than vouchers.

High childcare user

Robert Rust and his wife are proud parents of two toddlers and they bear £2,000 per month as childcare cost. As basic-rate taxpayer parents using vouchers, they would only have to pay £1,844 – a saving of £156. But in case of tax free childcare scheme, they have to bear 80 per cent of the cost which means they have to shell out £1,668 – and in the process save £176 extra as compared to childcare vouchers.

If both are higher-rate taxpayers, their total cost would be £1,896 – a saving of £104. And if Robert Rust and his wife use the new Tax-Free Childcare scheme, it'd cost them £1,668, a saving of £228

Utilize calculator for individual figures

In case you are not sure about the total figure and wish your personalised assessment, please make use of Government's childcare calculator by visiting https://www.gov.uk/childcare-calculator to see what help you're entitled to and how much you could get towards approved childcare.

Q 9: Your next step if you think Tax-Free Childcare is better option for you

If you desire to opt for the Tax-Free Childcare scheme, you just need to apply by visiting the link https://www.gov.uk/apply-for-tax-free-childcare. After the successful completion of the application, you have to inform your employer within three months that you are moving out of its voucher scheme. The easiest way to inform your employer is by calling your workplace and ask it to end your membership of the Childcare voucher scheme.

An important thing to note here is that even if you have moved to Tax-free childcare scheme, you can still use your stockpiled Childcare vouchers to take care of your childcare costs. You, however, need to ensure that you use the vouchers before their expiry date.

Q 10: What to do if you find Childcare vouchers a better option?

We are now at the end of the blog and we have discussed in detail about Tax-free childcare scheme and Childcare Voucher scheme and the benefits and drawbacks associated. After comparing the two and deciding that given your circumstances and childcare cost, the option for Childcare voucher suits you better, you can continue to use them. However, as we discussed above you can only continue with Childcare voucher scheme if you stay with the same employer and the employer continues to offer it.

Moreover, the option of moving on to a new employer who is offering Childcare vouchers to its employees is not available for you. The option of joining a new employee and still continue with childcare voucher is not available as once you move away from vouchers, there is no going back.

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