Whats next for the Childcare Voucher’s Scheme?

For many families, after their mortgage, childcare is the second largest monthly outgoing. Where there is government help available, with the closure of the Childcare Voucher’s Scheme for new members, many working parents are feeling apprehensive about what’s next and whether this could affect their monthly outgoings. Read the Budget Blog today where we provide you with an update on the closure of the Childcare Voucher’s Scheme as well as provide information on what’s next and what this could mean for you and your finances.

What is the Childcare Voucher’s Scheme?

The Childcare Vouchers Scheme is a UK government initiative aimed at helping working parents save money on childcare costs. The scheme was first introduced in 1989, however, in 2009 the government proposed shutting the scheme down which was met with a petition being started on the ‘Number 10’ website; the petition gained 93,000 signatures Gordon Brown who was Prime Minister at the time decided against the closure and the scheme continued to successfully run. 

In April 2011 the government did, however, make cuts to the scheme by ensuring that those considered ‘high earners’ benefited less from the scheme. These tax restrictions were only applicable to those who joined the scheme after April 2011.  For those who were already receiving childcare vouchers prior to this date, an entitlement of £243 per month tax and NI exempt was still allowed either until they changed employer or stop receiving vouchers for a period of 12 months or more.

How does the Childcare Voucher’s Scheme work?

The Childcare voucher’s Scheme works by providing working parents with what is known as a ‘tax break’. The scheme allows working parents to exchange part of their gross salary, tax and National insurance contribution free, for childcare vouchers which can then be used to pay for a wide variety of childcare for children up to the age of 16.

All registered childcare providers, as part of the government scheme, can accept childcare vouchers as a means of payment, these include:

  • Nurseries
  • Nannies
  • Crèches
  • Au pairs
  • Childminders
  • Holiday clubs
  • Breakfast and after school clubs
  • Extra-curricular activities (such as piano lessons)

Childcare vouchers are said to offer savings of up to £933 per year, per parent! So if both parents were claiming them that would equate to a saving of £1,866 per year!

The amount that you are entitled to, per week, tax and NI free, is all dependent upon your earnings and the tax rate applied to your earnings:

  • Basic rate taxpayers are entitled to up to £55 a week (£243 a month) tax and NI exempt
  • Higher rate are entitled to up to £28 a week (£124 a month) tax and NI exempt
  • Additional rate taxpayers are entitled to up to £25 a week (£110 a month) tax and NI exempt

What is the eligibility criteria for the Childcare Voucher’s Scheme?

In order to be eligible for childcare vouchers, you must simply be employed within the UK. Unfortunately, the scheme is not available to those who are self-employed. The scheme is based on the earnings/tax per person, not on a per child basis, therefore, if you have multiple children under the age of 16, there are no additional tax breaks available. However, if you do have twins, your nursery may apply a discount, at their discretion. You will need to check with your childcare provider to see if they offer this.

Can I still apply for the Childcare Voucher’s Scheme?

As of the 5th April, the Childcare Voucher’s Scheme will be closing for new applicants as the government is replacing it with the new ‘Tax-Free Childcare Scheme’. Should you wish to enrol on the Childcare Voucher’s Scheme, you must register and receive a voucher by the 5th April 2018. That said, if your employer makes/has made the decision to drop the scheme in favour of the new scheme then, as a worker, you will have no choice but to join the new scheme. Additionally, if you change jobs after the 5th April 2018, you will not be entitled to the old scheme, under your new employer. 

What is the Tax-Free Childcare Scheme and how does it work?

As is the case of ‘out with the old and in with the new’ for the UK government childcare schemes, the new Tax-Free Childcare Scheme offers parents a top up of £20 for every £80 to turn it into £100. This is the equivalent of 20% income tax, which is estimated to equate to a saving of £2,000 per year, per child.

What is the eligibility criteria for the Tax-Free Childcare Scheme?

You are only eligible for the Tax Free Childcare Scheme if you and your partner both earn less than £100,000 per year each and you can only apply for the scheme if both parents work.

In Summary, What do the two childcare schemes look like side by side?

Childcare Voucher’s Scheme:

  • Vouchers can only be purchased from your employer via salary sacrifice from your gross income
  • The scheme saves basic rate payers 20% income tax and 12% National Insurance for an overall saving of 32%. Higher rate payers can save 40#% income tax and 2% National Insurance, making an overall saving of 42%
  • A maximum annual saving of £933 for basic rate and £625 for higher rate per working parent can be made
  • The scheme is only available for employed workers. It is not offered to those who are self-employed
  • The scheme is based on your tax rate, tax breaks are not provided on a per child basis

Tax-Free Childcare Scheme:

  • Provides a top up, straight to your childcare provider, of £20 for every £80 spent
  • The scheme saves the equivalent of 20% income tax
  • A tax saving of 2000 per year can be obtained per child, per year
  • The scheme is only available to household’s where both parents work
  • The scheme is not available if either parent earns over £100,000

What childcare scheme is better for me?

This really is a question that I can’t answer unfortunately. This will differ on a case by case basis.

For example, where the new Tax-Free Childcare Scheme may benefit those parents paying for multiple nursery places, due to the fact that the tax saving is based on a per child basis. The old Childcare Voucher’s Scheme may better benefit those on a lower income, paying for a part time childcare place

That said, analysis from Money Mail that was published in This is Money revealed that ‘middle-earners could find themselves up to £500 a year worse off. This is because they do not spend enough on childcare to benefit from the full £2,000 saving’. They went on to say that ‘If they have average childcare fees of £3,796 a year they will pay about £480 more under the new system if they have one child’.

So as you can see, it really is different based on your income, tax rate, number of children and inevitably your employer.

If we delve through the pro’s and con’s, the bottom line, appears to be that the Childcare Voucher’s scheme will better benefit those who spend smaller amounts on childcare whereas the Tax-Free Childcare Scheme will better benefit those spending large amounts on childcare.

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