Changes to child care voucher system to be rolled out early 2017.

16th March 2017

By Jonathan Watts-Lay, Director, WEALTH at work.

Changes to the Child Care Voucher System will be rolled out from early 2017. Parents who are already members of the current Child Care Voucher system can continue in it, providing their employer will still provide access to it; new members will also have the opportunity to join the current scheme up until April 2018.

The new system, called ‘Tax-Free Childcare’, will be available online and the State will contribute 20p for every 80p that parents spend on childcare.  This is the equivalent of the 20% tax many people pay on their earnings, which gives the scheme its name ‘Tax Free Childcare’.

The maximum State contribution per year will be £2,000 per child (or £4,000 for disabled children). Parents must be in work to qualify and earning just over £100 per week, but no more than £100,000 per year, however they can have a combined income of over £100,000.

Parents will be able to apply by opening an online account which will be available through the government website www.gov.uk.  They pay into this account which is then topped up by the government to cover the cost of childcare with the registered provider. Parents will then need to re-confirm their circumstances every 3 months. It is possible to pay in more some months, and less at other times, meaning parents can build up a balance in their account to cover times when they need more childcare than usual. E.g. summer holidays.

Whether parents are better off with the old or new scheme depends on factors including how much they earn, how much they spend on qualifying childcare, whether both parents work, how old their children are, and how many children they have.  Tax Free Childcare will only be available to parents with children up to the age of 12 (17 if disabled), whereas the current Childcare Voucher system is available to children up to the age of 15 (16 if disabled); so those with older children could lose out. There will also be no National Insurance (NI) saving under the Tax Free Childcare system; therefore employed parents with lower childcare costs could be worse off.   Unlike the current Childcare Voucher system, Tax Free Childcare does not rely on employers offering the scheme to parents.  This is good news for those who work for companies that don’t offer the childcare voucher system and the self-employed.

The balance of NI and tax saving versus the 20% new top up only comes in favour of the new scheme once parents are spending more than £9,331.20 a year on childcare. This is because the greatest tax and NI savings available under the current Childcare Voucher schemes is £1,866.24. To achieve this benefit with the new scheme, parents need to be contributing £7,464.96 a year, which plus £1,866.24 (the 20% top up) is £9,331.20.

However with the current Childcare Voucher scheme, families can buy a maximum £5,832.00 of vouchers each year, saving £1,866.24. With the new scheme families can save up to £2,000 per child if they spend £8,000 per child. Therefore a family with two children, that spends more than £4,665.60 a year on childcare for each child, will be better off under the new scheme.

Higher rate tax payers are better off under the current Childcare Vouchers schemes until spending £6,249.60 on childcare per child. For example, with childcare vouchers when both parents are higher rate tax payers, they can buy £124 of vouchers each month, a total of £2,976.00 for the year. The combined tax and NI saving is £1,249.92, so for £1,726.08, they can get £2,976.00 of childcare vouchers (a 42% saving). With the new tax free scheme, £1,726.08 plus the Government top up would purchase £2,157.60 of childcare which could leave parents £818.40 worse off under the new system.

The balance of NI and tax saving versus the 20% new top up only comes in favour of the new scheme once parents are spending more than £6249.60 a year on childcare per child. This is because the greatest tax and NI saving available to higher rate tax payers under the current Childcare Voucher scheme is £1,249.92. To achieve this benefit with the new Tax Free Childcare system, parents need to be contributing £4,999.68 a year, when you add the Governments top up of £1,249.92 the total would be £6,249.60.

However with the current Childcare Voucher scheme, parents who are higher rate tax payers can buy a maximum £2,976.00 of vouchers each year, saving £1,249.92. With the new Tax Free Childcare system, families can save up to £2,000 per child if they contribute £8,000 per child. Therefore a family with two children, that spends more than £3,124.80 a year on childcare for each child, will be better off under the new scheme.

For more information, please contact us.

Further coverage can be found in Employee Benefits.