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Childcare vouchers v tax free childcare

March 23, 2018

Act now to receive the best option for your family.

The Government’s Childcare Vouchers scheme – which is operated through employers allowing employees to pay for childcare from gross earnings is closing to new entrants on 5 April. But if you’re not already enrolled and want to take advantage, you must apply now to allow enough time for the application to be processed.

Millions of parents are potentially eligible for childcare vouchers and a significant proportion of these are better off with vouchers than the Tax-Free Childcare scheme which is set to replace these vouchers. Many families could potentially lose out on thousands of pounds if they don’t act quickly as the scheme is about to close to new entrants.

However for some families Tax-Free Childcare is the best option. If you pay for childcare, using childcare vouchers saves many parents £1,000s a year. These vouchers – available via a special

Government scheme and operated through employers – allow you to pay for childcare from your PRE-TAX salary.

While it may not seem much, the impact can be huge. If you’re not taking advantage, check to see if it’s worth signing up – the scheme closes to new applicants on Thursday 5 April, so you need to apply now to allow enough time for your application to be processed by this date.

How does childcare vouchers work?

Childcare vouchers can save many parents with children aged up to 15 over £1,000 a year on childcare. Frustratingly, they’re only available via employers, but many companies take part.

The key is they allow you to pay for childcare out of your gross monthly salary before tax and national insurance deductions. This might not sound like much but the benefit is huge.

The deadline for new applications to the Childcare Vouchers scheme is Thursday 5 April. After that, parents who are not already signed up for childcare vouchers will not be able to get them.
That’s because the Government has rolled out Tax-Free Childcare, replacing childcare vouchers giving eligible parents an extra 20% towards childcare costs, up to a max of £2,000 per child per year.

Crucially, many parents are unaware that to beat the childcare vouchers deadline, you don’t just need to apply by 5 April, you need to have actually made a salary sacrifice and received the vouchers.

It works by ‘salary sacrifice’ also known as ‘benefits in kind’

Some very generous employers will simply give you the vouchers on top of your normal salary, but most will ask you to do what’s called a ‘salary sacrifice’.
For accurate savings figures, look at childcare voucher calculators on Computershare Voucher Services or KiddiVouchers.

How many vouchers can you buy?

Basic-rate taxpayers can pay for up to £243 of childcare with vouchers each month per parent meaning two working parents could get £486 of vouchers each month.
On 6 April 2011, new joiners paying higher or top-rate tax had their allowance cut so all taxpayers have roughly the same maximum tax saving. The limits in terms of vouchers you can buy are:

• Basic-rate (20%) taxpayer: £55/week voucher, max annual tax/NI saving £930
• Higher-rate (40%) taxpayer: £28/week voucher, max annual tax/NI saving £630
• Top-rate (45%) taxpayer: £25/week voucher, max annual tax/NI saving £590

The number of children you have doesn’t affect this, so the limits are the same however many children you have. Vouchers tend to last for a long time, so if you know you’re going to have higher childcare costs during the holidays, collect vouchers in advance. Vouchers are usually non-refundable, so don’t collect more than you can use.

Also many providers will let you backdate vouchers up to six months, although your child must be born for you to be able to sign up. Check your individual provider’s procedures first.

What counts as childcare?

The vouchers cover childcare up to 1 September after your child’s 15th birthday (their 16th birthday if they are disabled). The provider must be regulated. This could be a nursery, playgroup, nanny, childminder or au pair who is Ofsted registered.

You can also use childcare vouchers for tuition for your child, the tutor is providing ‘childcare’ at the same time as the tuition. However, the tutor/institution must again be Ofsted registered and also happy to accept vouchers.

Those whose relatives look after a child in the child’s own home won’t be eligible to receive the vouchers. Yet vouchers can be claimed for carers that are registered childminders looking after a child in their own home.

Where do I get vouchers from?

To receive vouchers your employer must run a scheme. Follow these steps:

Ask your employer if it runs a childcare voucher scheme.

Check with your HR department to see if yours does. Most big companies and the NHS run these schemes yet if you’re self-employed as a sole trader, you’re not eligible as you’re not classed as an employer.

What if your employer doesn’t offer a scheme?

Providing childcare vouchers shouldn’t cost your employer any money. In fact, as they don’t pay national insurance (NI) on the portion of tax you use for vouchers, it actually reduces their costs.

Firms can offer voucher schemes in one of two ways, either by operating the scheme themselves or by using one of the many voucher companies to manage the scheme for them. Providers include Kiddivouchers (which donates at least 5% of all profits to various charities) and Employers For Childcare (a not-for-profit organisation)

Vouchers may affect how much tax credit you can claim

Tax credits are simply a type of benefit credited to your bank account. The average payment is about £60 a week – over £3,000 a year, a sizeable sum.
But for some parents getting childcare vouchers reduces eligibility for tax credits because the amount of tax credit you get depends on how much you pay in cash not vouchers.

Should I go for childcare vouchers or not?

If you’re eligible for the childcare element of Working Tax Credit then you’re likely to be better off sticking with just tax credits and not getting vouchers. There are a few circumstances in which you could still gain getting vouchers such as if your childcare costs are above £175 a week for one child or £300 for two or more children.

If you can’t claim tax credits, then you will always be better off using vouchers to pay for childcare. Use the childcare voucher calculator on the Gov.UK site which will calculate if you’re better or worse off taking the vouchers.

You must choose between childcare vouchers or Tax-Free Childcare – so which one is best?

From 6 April 2018 new applicants will be not be accepted to join the Childcare Vouchers scheme. If you’re already a member, though, you will be able to continue for as long as your employer runs the scheme, or as long as you stay with your employer.

It will be replaced by the new Tax-Free Childcare scheme launched in April 2017, which gives eligible families an extra 20% towards childcare costs.

In total you’ll be able to use this new scheme to pay for childcare of up to £10,000 per child each year. However this new scheme won’t be favourable for everyone. A lot depends on how much you earn, how much tax you pay, and how much you pay for childcare.

Who benefits best under each scheme?

Tax-Free Childcare is best for:

Self-employed people or couples earning less than £100,000 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.

Childcare Vouchers are best for:

Couples where one parent doesn’t work, as they’re not eligible for Tax-Free Childcare, but the employed parent is eligible for vouchers.

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.

Higher earners, as anyone earning £100,000+ (or in a couple where one earns £100,000+) isn’t eligible for the scheme, whereas these high earners can get Childcare Vouchers.

What if I haven’t signed up to a scheme?

If Tax-Free Childcare won’t work out as well for you as Childcare Vouchers, but you’re not yet signed up, then you need to act quickly to take advantage before 5 April 2018.

I’m already signed up to get Childcare Vouchers

If you’re already signed up to the childcare vouchers scheme with your employer, then you can continue claiming them until your employer stops offering them, or you change jobs.

The Government has launched a new website called Childcare Choices which allows you to apply for the scheme but has staggered the signing-up process. See the Tax-Free Childcare guide for more info.

After applying for Tax-Free Childcare you will then need to give your employer written notice that you want to permanently leave their voucher scheme to sign up to Tax-Free Childcare.

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