The rules for tax-free childcare

The tax-free childcare scheme effectively replaced childcare vouchers. This was closed to new entrants in October 2018. The topic of childcare vouchers was covered by us in a previous post a couple of years ago.

tax free childcare

​​​​Key features of tax-free childcare

Childcare providers

It is only regulated and approved childcare providers that are eligible to receive payments from a childcare account (see below). The childcare provider will need to sign up online first in order to receive payments. You can check a childcare provider's eligibility to receive childcare payments before making a commitment. Most existing providers signed up to the new scheme when they received the sign up invitation in September/October 2016. 

Childcare accounts

Any payments into the childcare account are managed by parents via an online childcare account. The government will top up 20p for every 80p paid up to a maximum of £2,000 per child per year for an £8,000 parental contribution. The maximum government top up for disabled children is £4,000 (as opposed to £2,000 see above).

You can withdraw money from a childcare account at any time, but you will lose any contributions made by the government. 

You must also re-confirm your eligibility every 3 months.

Who is eligible to contribute to a childcare account?

You can contribute if you fall into one of the following categories:

  • The self-employed and employees who do not have employer-supported childcare (for this read childcare vouchers and workplace nurseries) 
  • Grandparents, other family members and employers can pay into the account
  • Both working parents who work the equivalent of 16 hours a week at the National Living Wage. This is judged 3 months from the date the claim is made, though may cause problems for a director on an annual payroll claiming
  • Parents earning less than £100,000 per annum
  • If either parent is part of an employer's childcare voucher scheme they cannot contribute to a childcare account

The differences between tax-free childcare and childcare vouchers

If you're currently using childcare vouchers and are thinking of switching to tax free childcare, the guidance below could prove useful.

  • Tax-free childcare is open to the self employed and employed, whereas childcare vouchers are for the employed only 
  • Tax-free childcare is available regardless of whether your employer makes a contribution, or offers it to you
  • You can only have one childcare account per child, as opposed to one voucher scheme per parent
  • You cannot use tax-free childcare if you are earning in excess of £100K per annum. All employees can use childcare vouchers as long as they are paid the National Living Wage after salary sacrifice
  • Anyone can pay into a childcare account. However if your company contributes this is treated as net salary after tax and national insurance
  • There is no requirement for both parents to work under the childcare voucher scheme

Changing from tax-free childcare to childcare vouchers?

If you want to leave your employer's childcare voucher scheme you'll need to provide them with a Childcare Account Notice (or CAN for short). You can send the CAN by email, however you must notify your employer within 90 days of opening the tax-free childcare account. 

Who is better off with tax-free childcare?

If you are self-employed or your employer doesn't offer childcare vouchers you are more likely to benefit under the new scheme. Additionally, if your childcare costs are high you can pay up to £10,000 per annum and the government will contribute £2,000. Whereas for childcare vouchers the maximum government 'contribution' is £933. This is the amount of tax and NIC saved when you receive  £243 per month of childcare vouchers. 

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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