Tax-Free Childcare is nearly here. That’s the name of a new scheme that means many parents who pay for childcare are to be eligible for up to £2,000 a year towards the cost. And in last week’s Budget our Money Saving Expert Martin Lewis spotted that the Chancellor finally confirmed it would start to be rolled out across the UK from next month.
There is already a range of help out there for childcare, so when should you use this and when should you use other schemes? For full information on all the options, see Martin’s full childcare help guide here’s quick info.
What is childcare? For all these schemes we’re talking of an Ofsted (or equivalent) registered provider, such as nurseries, nannies, childminders, after-school clubs and summer schools (age maximum 12 to 15, depending on which scheme it is).
1.Are you eligible for up to 30 hours a week of free childcare?
Currently, for at least 38 weeks a year (each week of the school year), if you’ve a three- or four-year-old in England, you’re entitled to 15 hours a week of free nursery childcare. Families with a low income may also get free early education for two-year-olds. From September 2017, this will increase to 30 hours a week, for families where no one earns over £100,000 a year and both parents work at least 16 hours a week (or one does, if a single parent). This isn’t without controversy though, as some nursery providers argue it won’t happen as the Government isn’t paying enough – and some may ask parents to top it up or increase costs to children who don’t qualify to make up the short fall.
2.Paying for childcare? Are you eligible for childcare tax credits?
The most important starting point is to check if you’re entitled to what’s technically called the ‘childcare element of working tax credit’ – this is NOT the same as child tax credit. You can usually claim it for children up to age 15, provided you pay for approved (Ofsted or equivalent) childcare.
Eligibility criteria are complex, but my rule of thumb is this: if you’re a single parent working 16+ hours a week, or a couple BOTH working 16+ hours a week, and your total household income is under £40,000, you should definitely check if you’re entitled. I’m not saying you will be, just that it’s worth checking. And it’s well worth doing, as a typical payout can be £3,000/year.
If you’re entitled to childcare tax credits, then go with that ahead of the two schemes below as it’s free cash as opposed to a discount (you can’t get tax credits with Tax-Free Childcare, while childcare vouchers can affect how many tax credits you can claim.)
3.Childcare vouchers – the existing scheme, but you’ve only got until the end of the year to sign up
You can only get these if your employer offers them, but many firms do, especially big ones. Here you usually trade in your pre-tax salary for vouchers. For example, a basic-rate taxpayer can swap £1,000 of salary, which after tax and national insurance is only £700ish in your pay packet, for £1,000 in childcare vouchers. You can then use them to pay for childcare. So you're up £300 per £1,000.
Any parent can do this, even if their partner doesn't work, provided their employer offers it (many do, but many don't). If you sign up beforeApril 2018 (the end of that tax year) you’ll be fine to continue doing this (as long as your employer still offers it).
4.New Tax-Free Childcare scheme – starts next month
The Chancellor said in the Budget that the new Tax-Free Childcare scheme will start being rolled out next month to parents of the youngest children and gradually across the year for the rest, but details are scant.
Here for every 80p you put in a special account at the Government-backed NS&I, the Government will add 20p up to a total of £8,000 per child. So that’s £2,000 added, but of course this can only be used for childcare.
Yet you can only get this if you work roughly more than 16 hours a week (or both of you do, if a couple) and neither earns over £100,000. The big plus, though, is this is nothing to do with your employer, so those who couldn’t get it before, including the self-employed, may be eligible.
5.You can’t use both childcare vouchers and Tax-Free Childcare, so which is better?
This is complex but it’s worth breaking into two.
- Firstly, are you eligible for either scheme? With childcare vouchers your employer has to offer it (some don’t); but if it does, it doesn’t matter if only one of you works, if you’re in a couple. Both people in a couple need to work to get Tax-Free Childcare.
- Which is best if you’re eligible for both? You can get more from Tax-Free Childcare – the maximum gain is £2,000 per CHILD (eg, £6,000 for three kids). With childcare vouchers it’s less – between £500 and £900 per PARENT depending on tax. Yet if your childcare costs aren’t going to get close to the maximums, the gain from Tax-Free Childcare is just 20% off, but on vouchers it’s between 32% and 47%, depending on your tax status. So, basically, if you’ve big costs Tax-Free Childcare wins; if you’ve smaller costs, childcare vouchers win.