Tax-Free Childcare scheme
HMRC have announced details of the new Tax-Free childcare scheme which is to be introduced in 2017. The scheme is expected to be available to around 2 million households.
To qualify
To be eligible, families will have to have all parents in work and each expecting to earn at least £115 per week, less than £100,000 a year and not be already receiving support through Tax Credits or Universal Credit. The scheme will be available for children up to the age of 12 (17 for children with disabilities).
Online childcare account
The parent will need to set up an online childcare account through the government website: Gov.uk.
Parents and others (for example grandparents, other family members or employers) can pay money into the account as and when they like, to cover the cost of childcare with a registered provider.
The government will also top up the account with 20% of childcare costs up to a total of £10,000 – the equivalent of up to £2,000 support per child per year (or £4,000 for disabled children).
Tax-free
The government top-up is the equivalent of the tax most people pay – 20% – which gives the scheme its name, “tax-free”.
From 2017
Tax-Free Childcare will be launched from early 2017. The scheme will be rolled out gradually to families, with parents of the youngest children able to apply 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.
The scheme will also be available to parents who are self employed, unlike the current system.
Current system (Employer-Supported Childcare)
The current system of employer supported childcare will continue to be available for current members if they wish to remain in it or they can switch to the new scheme. This scheme will continue to be open to new joiners until April 2018.
The existing system of employer supported childcare provides an income tax and national insurance contributions (NIC) relief, on up to £55 a week. This relief is per employee so if both parents are in employment the maximum exemption is £110 per week whereas in the new scheme the limit is per child.
Childcare providers
HMRC are asking childcare providers to register for the scheme as soon as possible.
Throughout September and October 2016, letters are being sent to regulated and approved childcare providers asking them to sign up online. Only childcare providers registered with a regulator (such as Ofsted) can receive Tax-Free Childcare payments.
The government will make more information available, including details of how parents can sign up, later this year. We will keep you updated as more details emerge.
Craig Walker is a senior tax manager at the firm. He advises on all matters tax related, both corporate and personal, including income, capital gains and inheritance. For more details and advice, please contact Craig on cw@hawsons.co.uk or 0114 266 7141.