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01 May 2018

Closure of childcare voucher scheme delayed until October 2018

Regular readers will know that the new Tax-Free Childcare scheme replaces the previous Childcare Voucher Scheme, which was due to close to new entrants on 5 April 2018.

HMRC announced last month that they would extend the deadline for applying to use the long-established Childcare Voucher Scheme until October 2018, due to repeated delays and hiccups in the introduction of the Tax-Free Childcare Scheme that replaces it.

This is great news for those incurring childcare costs for the first time, and for those who hadn’t got around to signing up previously, as for the next few months you have the option of either scheme, so can pick the one that benefits you most.

So, what are the differences between the two schemes?

The existing childcare voucher scheme allows an employee to sacrifice some of their salary in return for their employer buying them childcare vouchers of up to £243 per month. The advantage for the employee is that they will usually save tax and NIC on the salary reduction, and there is no tax or NIC on the childcare vouchers, meaning most eligible employees save 20% tax and 12% NIC on the vouchers. This equates to a 32% saving on the cost of their childcare.

The new tax-free childcare scheme works slightly differently. The individual saves into a childcare account (operated online by the parent, with a separate account for each child), and for every 80p they put in, the government will add 20p, up to a maximum government contribution of £2,000 per child per annum. The new scheme therefore provides the equivalent of 20% tax relief, but with no NIC saving, in a similar way to making personal pension contributions.

The eligibility criteria for the new scheme is also quite different. Both parents have to work over 16 hours a week (with childcare vouchers only one parent needs to work) and neither parent can earn over £100,000 per annum (there is no such restriction for childcare vouchers). In addition, the new scheme only covers children up to age 12, whereas the existing childcare voucher scheme runs to age 15.

So, who will win with the new tax-free childcare scheme? The new tax-free childcare scheme will be available to the self-employed, unlike the current childcare voucher scheme. Furthermore, for those employed, the current childcare voucher scheme is only available if your employer chooses to offer it, whereas the new scheme will be available to all as it doesn’t involve the employer.

Also, parents with high childcare costs could be better off. For example, for a two-parent family with 2 children in childcare, the maximum vouchers available under the old scheme where both parents work total £5,832 (i.e., £243 per month x 2) on which the tax/NIC saving is £1,866, whereas the maximum saving under the new scheme is £4,000 (i.e., £2,000 per child if at least £10,000 per child per annum spend on childcare).

In most cases, the existing childcare voucher scheme is favourable due to the NIC saving (32% overall saving on the childcare costs, vs 20% under the new scheme), and this is still open to new applications until October 2018. The scheme will then continue beyond October 2018 for those already signed up but will no longer be available to new applicants.

For further advice on this matter, please contact me.

 

Key Facts:

  1. Deadline for joining Childcare Voucher Scheme extended until October 2018
  2. New Tax-Free Childcare Scheme now available, operated online by the parents
  3. Allows equivalent of 20% tax relief for childcare costs (£2k max per child per annum)
  4. Doesn’t attract 12% NIC saving on top as with existing childcare voucher scheme
  5. More restrictive, but is open to self-employed and everyone employed

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