Tax-free Childcare Scheme Comes Into Force

how does tax free childcare work

Following a recent review of government spending on childcare a new Tax-free Childcare scheme will be available to over two million households in early 2017, to help parents with the cost of childcare. But how does tax free childcare work? Find out below.
The scheme will be rolled out gradually to families, with parents of the youngest children able to apply first and will be available to all qualifying families by the end of 2017. Parents will be able to apply for all of their children at the same time, when the youngest child becomes eligible.

The spending review and autumn statement 2015 confirmed that the qualifying conditions for the scheme are where both parents work, and each parent earns less than £100,000 per year and a minimum weekly equivalent to 16 hours at the rate of national living wage (around £115). The government will pay 20% of their yearly childcare costs up to £2000 for each child under 12 and up to £4000 for any child who is disabled and under the age of 17. Any eligible working family can use the Tax-free Childcare scheme as it does not rely on employers offering it, unlike the current Employer-Supported Childcare scheme. Parents who are self-employed or on paid sick leave, paid and unpaid statutory maternity, paternity and adoption leave will also be eligible for the scheme.

How does tax free childcare work?

The scheme will be operated through an online account directly through the government website, GOV.UK. Parents will be able to open an online account which they can pay into to cover the cost of childcare with a registered provider. Parents and others can pay money into their childcare account as and when they like. This allows the flexibility to pay in more some months and less at other times enabling a balance to be built up in the account to use at times when parents need more childcare than usual, for example, over the summer holidays.
The new Tax-Free childcare scheme differs from the current Employer-Supported Childcare vouchers in a number of ways. The current scheme offers childcare vouchers to parents – only if their employer takes part in the scheme, therefore limiting the number of eligible families. Employers who take part in the current Employer-Supported Childcare scheme, provide parents with Childcare vouchers as part of employees’ wages. Part of employees’ wages will be sacrificed in return for a similar value in vouchers. Currently employers pay no National Insurance on the amount of sacrificed salary agreed, and employees pay no national insurance or tax on the agreed value of childcare vouchers. However, the new Tax-Free childcare scheme does not rely on employers offering taking part in it and it will also be open to twice as many families than Employer-Supported Childcare.

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