Tax Free Childcare
In typical style, government assisted free and tax-advantaged childcare arrangements are about to become even more complicated.
With multiple schemes available, combined with new rules coming into force this year, it is imperative you understand your choices as making the wrong one may leave you worse off.
Below we highlight the main provisions of free and tax-advantaged childcare arrangements, if however you operate a limited company there are additional aspects you will need to consider. In these instances we strongly recommend you contact us for a FREE consultation to discuss structuring and how to optimise the reliefs available.
Childcare options
30 Hours free childcare
The Government now offers 30 hours free childcare to all three and four-year-olds, this comes with certain restrictions , one being that you are working a minimum of 16 hours a week.
Childcare Vouchers
Parents can use childcare vouchers to pay for childcare as long as their provider is registered to accept them. They can receive £55 worth of childcare vouchers from their employer every week, free from tax and National Insurance contributions and may continue to apply for vouchers until April 2018. After this date, parents can continue to receive the vouchers if they wish, but may not join the arrangement or increase their value.
Note also that this arrangement is being replaced by the new Tax-free Childcare.
Tax-free Childcare
Tax-free Childcare is a new Government scheme aimed at helping working parents with the cost of childcare.
Parents of the youngest children can now open an online account, which they can use to pay for childcare from a registered provider.
For every £8 a parent pays in, the government will pay in an extra £2. Parents can receive up to £2,000 per child, per year, towards their childcare costs, or £4,000 for disabled children.
The scheme will be available for children under the age of 12, or under 17 for children with disabilities.
To qualify, parents will have to be in work, and each expecting to earn at least £120 a week. Each parent must not have income over £100,000 per year.
Tax-free Childcare was introduced on 21 April 2017 and will be gradually rolled out over 2017. It will allow parents of children aged under 4 (on 31 August), and parents of disabled children (aged under 17) to enter the scheme first.
Parents will be able to apply for all their children at the same time, when their youngest child becomes eligible. All eligible parents will be able to join the scheme by the end of 2017.
Free early years education
Parents are eligible to free early years education (FEYE) for 3 and 4 year-olds as well as eligible 2 year-olds.
Currently, working parents of all 3 and 4 year-olds in England are eligible for 570 hours a year of FEYE, which is usually described as 15 free hours a week over an assumed 38-week year.
The scheme can also apply to 2 year-olds if their parents are eligible for income support, jobseeker’s allowance or related employment and support allowances.
To be eligible, each parent (if they are living together) must be in work, on parental leave, sick leave or annual leave, and be earning at least the national minimum wage (NMW) for at least 16 hours each week.
These arrangements are now being augmented and parents will be entitled to 30 hours per week of FEYE for all 3 and 4 year-olds as well as eligible 2 year-olds resident in England from September 2017.
This is an extension to the outgoing 15-hour FEYE scheme referred to above and allows parents to access 1,140 hours of FEYE a year. If taken equally across the year, this would equate to almost 22 hours of provision each week and the eligibility criteria remain as above.
Parents must ask their childcare provider whether they are offering this scheme and whether they have places available as it is not mandatory for childcare providers to offer this.
Child Benefit
Child benefit is paid every four weeks to eligible parents at a rate of £20.70 for the first child and £13.70 for each additional child under 16.
If one or more of the parents has annual income of more than £50,000, this benefit will not be tax-free and, if claimed, that parent will suffer a ‘high income tax benefit charge’.
Tax Credits
Tax credits, which are not subject to tax, are available to parents based on their level of income and circumstances, such as the number of children living with them. The provisions are quite detailed and eligible parents must ensure that their circumstances are fully and accurately reported.
Child tax credit may be claimed by a parent irrespective of whether they are working. HMRC’s overview says that child tax credit can be claimed by those responsible for children either:
- aged 16 or under – with claims being made until 31 August after their 16th birthday; or
- under 20 and in eligible education or training.
Working tax credit can provide additional support for working parents to help to cover the costs of ‘approved childcare’. This is:
- a registered childminder, play scheme, nursery or club;
- a childminder with an Ofsted-registered childminding agency;
- a registered school; or
- a home careworker working for a registered home care agency.
Universal credit may reimburse up to 85% of approved childcare costs for parents who have a job offer or are working, irrespective of the number of hours they work. The maximum amount of universal credit that can be paid in any one month is £646 for one child or £1,108 for two or more children.
Summary
As you can see there are many arrangements available however due to the introduction of earnings cap’s, you may not be eligible for all of them. Likewise if you have working hour restrictions or own a limited company, your options may differ entirely.
It’s also worth noting that childcare arrangements should not be used for the provision of education, specifically independent school fees, however in certain instances they can be sued for after school clubs and boarding costs.
We provide accountancy services and tax advice to small limited companies and individuals, contact us today, we have accountants in Essex, Accountants in Canary wharf and Accountants in Manchester waiting to discuss your situation.
