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TAX BREAKS ON CHILDCARE COSTS – GOOD NEWS FOR THE SELF-EMPLOYED!
Tax breaks on childcare costs – Good news for the self-employed! By Paul Cox, Associate Director, Paish Tooth
Back in April 2017 the Government opened a new Tax-Free Childcare (TFC) initiative that was set to ultimately replace the existing Childcare Vouchers scheme (CCV) open to employers. Initially the Childcare Vouchers scheme was to close to new entrants from 5 April 2018; however the Government have extended this deadline by 6 months to October 2018 (exact date TBC).
The new TFC scheme provides options to employed parents and those self-employed parents who have previously been unable to benefit from a CCV scheme. Unfortunately parents will not be able to benefit from both schemes, so if you are eligible to use both you will need to assess which scheme is best for you. The Government has produced a useful calculator (https://www.gov.uk/childcare-calculator) that establishes which scheme might suit you most, and also highlights whether you can benefit from any free childcare hours or tax credits.
What happens to existing CCV scheme members?
• Parents in the scheme before the October 2018 cut-off can continue to benefit from the CCV scheme until their child reaches 16 (or 17 if their child is disabled).
• If your circumstances change in future and TFC would be better for you, you can switch schemes; however once you join the TFC scheme you cannot go back to a CCV scheme.
Who is eligible for each scheme?
Childcare Vouchers Tax-free Childcare
• Single parents • Single parents
• One or both parents if they are employed and their employer has a scheme
• If two parents are in your household, both must either be employed or self-employed
• For children under 16 (17 if disabled) • For children under 12 (17 if disabled)
• No income limits • Neither parent can earn over £100,000 per annum. Each parent must earn at least £120/week if over 21 (different rates apply if parents are aged 16-21)
• Can be used whilst claiming Child Tax Credits, Universal Credit or the 30 hours free childcare for 3-4 year olds.
• Cannot be used if claiming Child Tax Credits, Universal Credit or where either parent is benefiting from a CV scheme.
• Self-employed parents cannot join • Self-employed parents are eligible
How do the savings available on each scheme compare?
Childcare Vouchers – savings are calculated per parent
Each parent can save up to £933 per year depending on their highest tax rate. Therefore if both parents claim it can result in a saving of £1,866 per year.
Tax-free Childcare – savings are calculated per child
For every 80p paid in by parents, the Government will add an extra 20p. The government’s maximum contribution is capped at £2,000 per child per year (£4,000 if the child is disabled).
How do each of the schemes work in practice?
Childcare Vouchers are provided through employer operated schemes. They operate on a salary sacrifice basis – i.e. the employee gives up part of their salary in exchange for receiving childcare vouchers, and in turn saves both income tax for themselves and National Insurance for both themselves and their employer.
There are limits to the amounts that can be provided as childcare vouchers, whilst maintaining the tax and NI savings. These limits are based on an employee’s highest rate of income tax - £243/month for basic rate taxpayers, £123/month for higher rate taxpayers, and £110/month for additional rate taxpayers. Any amounts in excess of these will see the additional amounts lose their tax/NI savings.
By contrast, Tax-free Childcare is a government-backed scheme, using an online savings account through National Savings & Investments. You must re-confirm your eligibility for the scheme every 3 months.
Making a choice
In order to decide which childcare saving scheme to go for, you’ll first need to gauge which scheme(s) you are entitled to join. You can also use the government’s calculator to assess which one gives you the best savings.
Speak to your employer while CCV is still available, and if no CCV scheme currently exists at your place of work why not open one before October 2018 – it’s easy to do and will save your employer money too! Don’t forget that you can always switch to TFC in the future, but once you’ve joined it you cannot go back to a CCV scheme.
If you have any queries about maximising your tax-free savings using childcare schemes, then please do speak to the team at Paish Tooth and we’ll be happy to help.