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Time to weigh up pros & cons of the new childcare voucher scheme

By Lesley Stalker on 26 October, 2015

 

Autumn is always a favourite season for children keen to trick or treat and this year, depending on your personal circumstances, treats could be coming to parents too, from an unlikely source. HMRC has revised its childcare voucher system and depending on their individual circumstances, some taxpayers could be in for either a trick (additional rate tax payers) and some for a treat (single parents and the self employed).

For many years, HMRC has operated a very popular childcare voucher system through which parents can, as part of a salary sacrifice scheme, opt into buying vouchers which are redeemable against qualifying childcare costs. This has been reformed in favour of a new system, which, for some parents, could mean they are significantly better off. Not so for others however, meaning it is important to understand the implications, because parents who are already part of an existing childcare voucher scheme are entitled to remain on the existing system until their children reach the age of 15, provided they stay with the same employer throughout this time.

How does the new childcare system work?

The new childcare voucher scheme is an online system under which eligible parents can buy vouchers online, paying 80p for every £1 spent on childcare, with the government covering the remaining 20p. Over a three-month period, parents can spend up to £2,000 per quarter, per child, on vouchers which are held in an online savings account to be used for OFSTED approved childcare costs. In return, the government will top up these payments by up to £500 per child for the period.

An annual maximum of £10,000 worth of childcare per child can be paid for using the new childcare voucher account, with the government providing up to £2,000 of the total cost. For some taxpayers, this is more generous than the original voucher scheme, which was capped at a maximum expenditure of £6,000 per year with a maximum £1,200 government contribution in the form of tax relief.

Since the new childcare voucher scheme works through an online account, parents wishing to register for the scheme will be entitled to withdraw funds from their online childcare accounts. However, when voucher money is withdrawn, the government will also deduct the proportion they have contributed automatically.

Financial support provided through the new scheme is to be strictly controlled and parents will need to re-apply each quarter, for each child receiving childcare. This will ensure that there has been no change to their financial circumstances and therefore eligibility. It is this aspect of the scheme that could mean parents are worse off because currently, childcare vouchers are available to all parents regardless of whether one or both parents are in employment.

 

Who is eligible for the new childcare voucher scheme?

The new scheme is only open to taxpayers where both parents are working regularly and each parent earns below £150,000, the point at which the additional rate of tax applies. So if joint household income is £299,000, with both parents earning just below the additional tax rate threshold, they will still qualify for the new childcare voucher scheme. Single parents are eligible to benefit and where a couple are separated, only one parent will receive the government’s childcare payments. Helpfully, parents who are self employed are now also able to use the childcare voucher scheme whereas they have been excluded from the current scheme which is only available for ‘employees’.

 

Winners and losers?

Parents who are already using the current childcare voucher scheme will need to weigh up the pros and cons of each and decide which will provide the best value in the long term. Eligibility issues aside, the amount of money a family spends on childcare and their tax bracket will determine whether it is more beneficial to remain with the older scheme or use the new one.

When summarising the benefits of the new childcare voucher scheme, the government has said that a working couple with one child will be £134 better off than currently; provided they are spending their full £10,000 entitlement, a couple with 3 children will be £5,375 better off and a single parent with 2 children will be able to claim back £3,067 of the cost of childcare from the government.

 

Will nannies become more ‘affordable’?

Provided both parents are working, it would appear that the more a family spends on childcare, the more they will benefit. This could result in a nanny actually becoming a more affordable option for many - provided they are OFSTED registered and their employers understand the potential employment tax pitfalls (read our earlier blog for more on this).

For advice on tax planning, please contact Lesley Stalker by emailing las@rjp.co.uk

 

 

 

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