‘Tax free’ childcare moves closer

Wed 06 Aug 2014

At Budget 2013, the Government announced its intention to introduce a new Tax-Free Childcare scheme.   The scheme will launch in autumn 2015 and will be available for children up to the age of 12 (or 16 if the child is disabled).  To qualify parents need to be working and earning just over an average of £50 per week up to a maximum of the additional rate threshold, currently £150,000 per annum.

In order to benefit from the scheme, a working family will need to register to open childcare accounts for each of their children.  HMRC will perform eligibility checks and if these are met, the accounts will be opened.  The family (not just parents but wider family members too) can then pay money into their childcare accounts.  For every 80p they pay in, the Government will contribute 20p (i.e. equivalent to the basic rate of tax, giving the scheme its name of being ‘tax free’).  The amount that the Government will contribute is capped at £2,000 per child and £10,000 per family per year.  It is then up to the family to allocate the money in the account to a qualifying childcare provider of their choice.  Unlike the current Employer Supported Childcare scheme, this scheme doesn’t rely on participation by employers, so anyone who meets the eligibility criteria can benefit, such as self-employed individuals.

After a period of consultation, the Government has announced that the childcare accounts will be provided by National Savings & Investments (NS&I).  This is on the basis that the accounts must be simple to operate by parents and child carers to encourage take-up, and because it is also a trusted brand which offers the security of being government backed.

This will be a generous and flexible scheme for working families, who will need to make sure they register to benefit.  Those already participating in employer schemes don’t need to switch if they prefer not to, but parents won’t be able to register for Employer-Supported Childcare after Tax Free Childcare is introduced next autumn.  Employers will be able to pay money into employees’ childcare accounts under the Tax Free Childcare scheme. However there will be no specific provision for employer contributions and the NIC disregard that applies to employer-supported childcare will disappear. Therefore salary sacrifice arrangements will not be possible under Tax-Free Childcare, only net pay schemes.