From 28 April 2017 you’ll have a choice of two systems to fund your childcare.
Current system – childcare vouchers
An employer may offer Employer Supported Childcare (“ESC”), usually provided through childcare vouchers. These vouchers can be provided to employees in addition to their annual salary, however more often than not, the employee will sacrifice a proportion of their salary in exchange for receiving the vouchers. This means there will be an income tax and national insurance saving on their childcare costs.
This system can be utilised by both parents for the same child up to the age of 15 (age 16 if their child is disabled), but only if their employer offers a childcare voucher scheme.
At the beginning of each tax year the employer will carry out a basic earnings assessment for each employee who joined their ESC scheme from April 2011. This will determine the maximum amount of childcare vouchers that can be provided. The weekly amounts are:
- £55 for basic rate tax payers
- £28 for higher rate tax payers
- £25 for additional rate tax payers
From April 2018, the ESC scheme (current system) will no longer be open to new entrants. If an individual is already a member of an ESC scheme, they can continue to receive vouchers as long as their employer continues to offer the scheme and they do not leave their employment.
Tax Free Childcare (“TFC”) is being rolled out gradually from April 2017 and will eventually replace the ESC scheme as described above. The TFC scheme doesn’t require involvement from an employer, and therefore self-employed individuals will also be allowed to join.
To be part of the TFC scheme, parents must register for an online childcare account. Anyone can deposit money into this account, including grandparents to pay for childcare costs for children up to the age of 12 (age 17 if disabled). Deposits made into the account will be topped up by HMRC by 20p for every 80p deposited.
This means the account can be used to pay for childcare up to a maximum of £10,000 per child each year, being £8,000 deposited and a £2,000 contribution from HMRC. Any additional contributions will not receive the HMRC subsidy.
To be eligible for the TFC scheme, both parents or partners in the same household (unless they are a sole parent) must be working and each have earnings comparable to at least 16 hours a week at the national minimum wage; the equivalent of £120 per week from 5 April 2017. There is a maximum income of £100,000 per parent, so if one individual earns more than the threshold, as a couple they cannot access the scheme.
Parents will need to decide which scheme works best for them; they cannot use both. Generally, those with fewer children and lower childcare costs may benefit more under the current ESC scheme, whereas TFC may be beneficial for those with more children and higher childcare costs.
Parents must notify their employer that they are no longer entitled to ESC if they register for TFC. Prior to 6 April 2018, there is the option to return to the ESC scheme if this is preferred.
As ever, please do contact Michael Burgess on 01782 279615 if you have any questions.