Tax-free childcare scheme comes into force

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BOND ADAMS EMPLOYMENT UPDATE by Dispute Resolution Partner, Rafique Patel

In families where both parents work and each parent earns less than £100,000 per year, and a minimum weekly income at least equivalent to 16 hours at the rate of the national minimum wage, the Government will pay 20% of their yearly childcare costs (capped at £2,000 for each child).

The scheme will apply to parents with children aged under 12. The Government has said that the scheme will be introduced in early 2017.

 

Tax-Free Childcare scheme delayed until 2017

 

Self-employed parents and those with more than one child who’ve been waiting for the Government’s new Tax-Free Childcare scheme to launch this autumn will now have to wait till 2017, following a Supreme Court judgment today.

Two providers of the existing Employer Supported Childcare voucher scheme mounted a legal challenge against the Government’s new scheme following concerns about how it would be delivered and the effect it would have on parents trying to access childcare support.

 

But the Supreme Court has today thrown out this argument and confirmed the scheme is “lawful”. However, as the court placed a suspension on the scheme being developed during the 15-month legal proceedings, the new Tax-Free Childcare scheme now won’t come into force until 2017 – a delay of over a year.

The news is a blow for those who will better off under the new scheme, but it will benefit those who gain more from the existing provision as they’ll be able to continue using it up until it’s replaced.

It is disappointing that some organisations involved in the existing scheme felt the need to take and persist in this costly and wasteful course of action, which has led to a delay in the launch of Tax-Free Childcare.

 

“We are now pressing ahead with the scheme as part of our on-going commitment to support working families.”

 

What are the two schemes?

 

  • Tax-Free Childcare: Under the Government’s new Tax-Free Childcare scheme, which will now launch in “early 2017” – no specific date has been given by the Government – eligible families will get 20% of their annual childcare costs paid for by the Government.

 

The way it works is that for every 80p you pay into a newly-created Childcare Account, the Government will contribute 20p. This could mean up to £2,000 per child (the scheme assumes a maximum of £10,000 per year childcare costs per child. If you pay more, you won’t get more help).

But crucially, both parents need to be working in order to qualify.

 

  • Employer Supported Childcare: The childcare vouchers scheme on the other hand enables many taxpayers with kids aged up to 15 to pay for childcare with vouchers each month via salary sacrifice from their employer.

 

As an example, you give up £1,000 of salary, worth £700ish in your pocket after tax and National Insurance. You get £1,000 of childcare vouchers in return. This means you’re £300 better off per £1,000. This is per parent, so the maximum two [basic rate tax paying] parents could get is £486 of vouchers each month.

 

So which scheme is best for me?

 

For a full rundown on the winners and losers see our Childcare Vouchers guide. But in brief:

Those who win Tax-Free Childcare:

 

  • Self-employed people or couples who earn less than £150,000 each, as they’re eligible for Tax-Free Childcare, but can’t get childcare vouchers.

 

  • Parents with more than one child and high childcare costs, as the help available goes up with the number of children. There’s a limit for childcare vouchers, which isn’t dependent on the number of children.

 

Those who win with childcare vouchers:

 

  • Couples where one parent doesn’t work, as they’re not eligible for Tax-Free Childcare, but the employed parent is eligible for vouchers (provided their employer offers a scheme).

 

  • Basic-rate taxpayer parents with total childcare costs of £9,336 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare.

 

 

  • Higher-rate taxpayer parents with total childcare costs of £6,252 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare.

 

  • Additional-rate taxpayers, as anyone earning £150,000+ aren’t eligible for the scheme, whereas additional-rate taxpayers can get childcare vouchers.

 

For advice on all aspects of employment law including representation in the employment tribunal, representation in the Employment Appeal Tribunal and the courts, contact our partner Rafique Patel on rafique.patel@bondadams.com

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