Parents with children in childcare have an important decision to make in 2017. The Government will launch the new Tax Free Childcare Account (Childcare Account) and for the self-employed parents this will mean that they have access to tax incentivised childcare for the first time.
But for employed parents (including company directors) the decision to open a Tax Free Childcare account Is a decision to think carefully about.
Up until April 2018 it will be possible for employers to offer tax incentivised Employer Supported Childcare Voucher Schemes (Voucher Schemes) to employees (including company directors) and in many circumstances the tax incentives of the Voucher Scheme will far outweigh those of the Childcare Account.
The Childcare Account is with NS&I in partnership with HMRC and for every 80p deposited in the account the Government will add 20p to the account, up to a maximum of £2,000 per child (£4,000 if the child is disabled). This appears very generous and in many cases it will be the best option for helping to fund childcare costs however there are a number of downsides.
BOTH parents can benefit from having an employer who has put in place a Voucher Scheme and in the case of two parents both working 35 hours per week and earning a salary of £32,000 gross each then the childcare costs for 2 children would need to be in excess of £18,000 per annum for the parents to be better off using the Childcare Account. Any childcare costs under this amount would gain better tax reliefs by going through a Voucher Scheme.
In the case of parents earning over £50,000 where the child allowance has been withdrawn a salary sacrifice scheme for childcare costs could bring down the salaries to below the £50,000 limit and the child allowance would be reinstated.
The other point to note is that the Childcare Account is only open for children up to the September following their 11th birthday1 whereas the Voucher Scheme is available to help fund the costs of childcare up until the September following the child’s 15th birthday2.
There are many individual aspect to these calculations for example if either of the parents are claiming tax credits with the childcare element and so it would be wise to review individual circumstances. If you would like us to check the best option for you and your family or you are a director or employer who would like to know more about Childcare Voucher Schemes please call us.
Note 1 – For children who are disabled the support will continue until the September following their 17th birthday
Note 2 – for children who are disabled the support will continue until the September following their 16th birthday.