‘Tax free’ childcare moves closer

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 registerto open childcare accounts for each of their children. HMRC will perform eligibility checks and ifthese are met, the accounts will be opened. The family (not just parents but wider family members too) can then paymoney into their childcare accounts. Forevery 80p they pay in, the Government will contribute 20p (ie. equivalent tothe basic rate of tax, giving the scheme its name of being ‘tax free’). The amount that the Government willcontribute is capped at £2,000 per child and £10,000 per family per year.  It is then up to the family to allocate themoney in the account to a qualifying childcare provider of their choice. Unlike the current Employer SupportedChildcare scheme, this scheme doesn’t rely on participation by employers, soanyone who meets the eligibility criteria can benefit, such as self-employedindividuals.

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

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