The New Tax-Free Childcare Scheme

In April 2017, HMRC began to roll out its new tax-free childcare scheme and on 14 February 2018 this was opened up to all working parents with children under the age of 12. For the first time, this includes parents who are self-employed which will be welcome news for the self-employed who have previously received very little in terms of childcare tax breaks.

Tax-free childcare available to all working parents with children under the age of 12

Under the scheme, for every £8 that a parent contributes to the scheme, the government will instantly top it up with an additional £2. The government will contribute up to £2,000 per year for each child, though this is restricted to a maximum of £500 per quarter; to benefit from the full £2,000 per year, parents would therefore need to contribute £2,000 per quarter, i.e., the full £8,000 cannot be contributed in one go at the end of the year as this would only be eligible for £500 of government top-up for that quarter. The funds must be used to pay for approved childcare, which includes registered childminders, nannies, nurseries, playschemes and after school or holiday clubs.

A parent is eligible for the scheme if they are employed for more than 16 hours per week and earning at least the national minimum wage or living wage but less than £100,000 per year.  The minimum wage restriction does not apply to those who have been self-employed for less than 12 months.

It is important to note that tax-free childcare cannot be claimed at the same time as receiving childcare vouchers from an employer nor any form of tax credits such as working tax credit, child tax credit or universal credit. In these scenarios, it is essential to use the government’s childcare calculator to identify which benefit(s) work best for your specific situation. Those that are employed or operating a business through a limited company need to be aware that the childcare vouchers scheme will close to new applicants from 6 April 2018. Childcare vouchers can continue for existing applicants so if you are already making use of the scheme and will be better off under that than the newer tax-free childcare scheme, it makes sense to continue with the childcare vouchers.  Those that have not registered for childcare vouchers with their employer or set up a childcare vouchers scheme through their own limited company may want to consider doing so by 5 April 2018 if they would be better off with childcare vouchers rather than tax-free childcare.  Parents switching from childcare vouchers to tax-free childcare must give formal notice to their employer within 90 days so that the employer is aware of the need to cease issuing childcare vouchers.

To participate in the tax-free childcare scheme, parents must first register for a childcare account here. You will need your Government Gateway login details if you have them and if not, this will need to be set up first before moving onto the childcare account registration process.  There were many teething problems with the registration process within the first few months of the scheme being rolled out but we understand that these have now been resolved and it should be fairly straightforward to set an account up. One an account has been set up, parents can start to pay their approved childcare provider straight away from the account.

Further detailed guidance on tax-free childcare is available here. More general information on all the help available with childcare costs is available here.

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