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Tax Free Childcare Vs. Childcare Voucher Scheme

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Tax Free Childcare Vs. Childcare Voucher Scheme

If you’re currently considering the childcare options that might work best for you and your family, you have two options to choose from. And now, your options are narrowing as the childcare voucher scheme will soon stop accepting applications, so the clock is ticking.

In this article, the Financial Management Centre team explain what each childcare scheme is, how they work, and which is the best choice for you.

 

 

What is the childcare voucher scheme?

The childcare voucher scheme was an old government initiative that is soon closing its doors to new applicants. You now only have until October 2018 to sign up for the scheme.

The scheme works through a salary sacrifice. This is where you set aside a portion of your wages to pay for your childcare. In return for the salary sacrifice, you will be given childcare vouchers that can be spent in nurseries and childminders, out of school clubs, nannies, and after school clubs.

The amount of money that you sacrifice as a part of the scheme won’t be taxed and this is one of the ways you save money on your childcare costs. For example, if you are a basic rate taxpayer and you choose to sacrifice £1,000 of your salary, you will save £200 (£1,000 × 20%).

If you are a basic rate taxpayer (earning up to £46,350), you can use up to £243 a month in childcare vouchers. This falls to £124 a month if you are a higher rate taxpayer and £110 a month if you are in the additional rate tax band.

The childcare voucher scheme is best suited to people in the following situations:

  • Those who pay more than £9,336 a year in childcare costs (or £6,252 as a higher rate taxpayer),
  • If only one of the parents works,
  • Those earning £100,000 a year or more.

An employer has to sign up to participate in the childcare voucher scheme. If you’re a director of your own limited company, you can sign your firm up for it and then take advantage of it yourself. Please get in touch with us and we’ll tell you how to get started.

 

What is tax free childcare?

Tax free childcare is the new replacement for the childcare voucher scheme. It is already available for applications (launched April 2018).

This scheme operates through a childcare account. For every £8 you put in, the government will put in an additional £2. This is up to a maximum of £2,000 per year, per child up until the age of 12.

If your child is disabled, these limits raise to £4,000 per year, per child up until the age of 17.

In order to qualify for this scheme you must earn the equivalent of 16 hours on minimum wage (or the national living wage, whichever is applicable) and earn less than £100,000. Additionally, both parents must be working in order to be entitled to the scheme.

 

Which is the best option for me?

Each scheme will be more suited to some more than others – it all depends on your individual circumstances. We recommend that you seek the advice of a professional accountant to determine which scheme is best for you because the childcare voucher scheme will shortly stop accepting applications.

The childcare voucher scheme is a better option if you earn over £100,000, if only one parent works, or if you spend a lot of money on childcare per year.

Tax free childcare is the better option if both parents work, if you are self-employed, and if you earn less than £100,000 a year.

 

We can help

If you would like some advice about which childcare scheme will save you the most money, get in touch with our team. We are more than happy to discuss your current financial situation with you and make sure you are placed on the right scheme while you still have both options available to you.

 

Call us today on 0800 470 4820 or email us at info@tfmcentre.co.uk