Parents need to ensure they are prepared for the switch from childcare vouchers to a new system of tax-free childcare from next year.
The new scheme will benefit parents with high childcare costs and the self-employed, but will leave some basic-rate taxpayers and single parents worse off, according to one analysis.
Tax-free childcare will be launched early next year, and childcare vouchers will then be withdrawn in 2018.
The new scheme is hugely beneficial to the self-employed, who are currently denied access to childcare vouchers because they are offered only through employers.
The vouchers are also not offered by all employers, meaning that many people miss out.
The analysis, from Sodexo Benefits and Rewards Services, a facilities management company that runs a voucher scheme, suggests that many parents would do better to stick with childcare vouchers, although some current voucher users will in fact be better off with the new scheme.
The childcare voucher scheme will close to new entrants in April 2018 but is likely to keep running for existing members after that – this will be at the discretion of the employer.
How are the two schemes different?
Put simply, tax-free childcare offers savings per child per year, while childcare vouchers offer savings per parent per year.
Currently parents can claim childcare tax credit or pay for childcare vouchers, which are paid for from their salary before it’s taxed.
With childcare vouchers, each parent can spend £243 on childcare using vouchers each month no matter how many children they have, as long as the parent is a basic-rate taxpayer. This represents a saving of £930 a year.
There are no eligibility checks – anyone who is a parent or has responsibility for a child is eligible.
Under the new tax-free childcare scheme, parents will have 20pc of their childcare costs each year met by the government, up to a limit of £2,000 a year per child.
Unlike with vouchers, self-employed people can take part, although there are some eligibility rules. Both parents (if they are together) must be working 16 hours a week and paid at least the national living wage of £7.20 an hour.
Tax-free childcare is also unavailable to anyone who is claiming tax credits or universal credit.
At the other end of the scale, if either parent earns more than £100,000, both parents are disqualified.
So which is better?
It depends on your situation. According to Sodexo’s data, 64pc of people are better off with the voucher scheme. Of the 9,259 people who used its online calculator in August, 5,952 were better off with vouchers and the other 3,283 were better off with tax-free childcare.
However, this may partly be because existing voucher users are more likely to be using the calculator.
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Groups such as self-employed people and workers whose companies don’t offer the vouchers, who don’t benefit from the existing scheme but would be able to use the new scheme, might be unaware of Sodexo’s website and calculator.
Those who will lose out under the new scheme include families where one parent works and the other doesn’t – they can claim vouchers, but will be ineligible for tax-free childcare.
Divorced couples might also run into difficulties: whereas parents can under the current scheme each use their own allowance for their children, under the new one the allowances are per child – so some negotiation may be needed.
For families in the basic-rate tax bracket who qualify for either scheme, anyone who spends less than £9,336 in total on childcare would be better off with vouchers. The same goes for those who pay the higher rate and spend less than £6,252 in total.
On the other hand, families with many children are more likely to benefit from the new scheme, as the system works on a per-child basis rather than per parent.
If you spend large sums on childcare the new system is also likely to be better, as you can get up to £2,000 a year per child, whereas under the voucher system the maximum you can save per parent is £930 a year.
If you can, the best thing to do is to sign up for the voucher system now and start benefiting as early as possible – if the new system is better for you, you can then switch to it when you become eligible next year.
Families with the youngest children will be eligible first, and families must have at least one child under 12 – another point to note, as vouchers can be used until the September after the child’s 15th birthday.
Other things to think about
Receiving childcare tax credit disqualifies you from claiming tax-free childcare under the new system. But it might also mean that you’re better off not using childcare vouchers either.
This is because some people will get a proportion of their childcare free using tax credits – but they have to pay for it in cash. If they use vouchers, which they had to buy, to pay for childcare instead, they won’t get the benefit.
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