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Child care vouchers vs tax free child care: which is the winner?

Victoria Chambers

05 September 2018

The Government’s child care voucher scheme is coming to an end. Applicants can only apply up until 4 October 2018, after which time new entrants will not be allowed. However, the Government launched a new scheme in 2017 called tax free child care which will replace child care vouchers. What is the difference and how will it affect employees?

Child care vouchers

Child care vouchers have been running for years and can be used to pay for registered child care for children up to the age of 15. They allow you to pay for registered child care from your pre-tax salary, which your employer will action through the payroll. As the vouchers are paid for pre-tax, they are recognised as salary sacrifice and therefore lowers your salary and the amount of NI you will pay. Vouchers are restricted to £243 per month, per parent, tax free for basic rate earners, but even if you earn less than the basic rate threshold, you are still entitled to them – as long as one parent is working.

Child care vouchers are only available through your employer, so you will first need to check that your employer operates such a scheme, as not all of them do. If they don’t then you can’t benefit from them. However, under the Government’s newly launched tax free child care, anyone can apply.

Tax free child care

As the new scheme works between the individual and the Government direct, child care savings are no longer processed through the payroll. Consequently, there is no need for any involvement from the employer, as an employee applies direct through gov.uk and can set up payments to their chosen registered providers.

The main difference to the previous child care voucher scheme is salary, which is no longer affected by using tax free child care. However, there are a couple of changes to be aware of. The Government will now contribute up to £2,000 per year, per child. This is instead of the £243 a month (£2,916 annually making the tax saving £933) per parent for basic rate earners. The allowance can also only be used for registered child care for children up to the age of 12, not 15 as previously.

The claim per child could be more beneficial if you have more than two children in child care. But, there is a minimum earnings threshold per parent of £120 per week. Both parents must be working if they are claiming as a couple.

Which is best?

Tax free child care wins for:

  1. Self-employed people or couples who earn less than £100,000 each, as they’re eligible for tax free child care, but can’t get child care vouchers.
  2. Parents with more than one child in child care and high child care costs, as the help available goes up with the number of children. There’s a limit for child care vouchers which isn’t dependent on the number of children.

Child care vouchers win for:

  1. Couples where one parent doesn’t work, as they’re not eligible for tax free child care, but the employed parent is eligible for vouchers (provided their employer offers a scheme).
  2. Basic rate taxpayer parents with total child care costs of £9,336 or less. Under this amount, the saving you make with child care vouchers exceeds the saving you can make with tax free child care.
  3. Higher rate taxpayer parents with total child care costs of £6,252 or less. Under this amount, the saving you make with child care vouchers exceeds the saving you can make with tax free child care.
  4. 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 child care vouchers.

What to do next

If you want to apply for the old child care voucher scheme, you have to be in the scheme and received your first vouchers before 4 October 2018 (so you need to be having a deduction in September to be eligible to join). After that date, only existing users can continue to use them as new entrants will not be allowed in to the scheme. You can apply for tax free child care and 30 hours free child care. You can apply for all of your children at the same time. To apply, go to: www.childcare-support.tax.service.gov.uk. It’s simple and should take around 20 minutes.

You can also find more information on the child care choices website www.childcarechoices.gov.uk. If you would like to know more about tax free child care, or child care vouchers, contact Wilkins Kennedy to see how we can help.

About Victoria Chambers

Victoria Chambers

Victoria joined Wilkins Kennedy in 2013. She is a senior payroll professional who is a member of the Chartered Institute of Payroll Professionals and achieved the foundation degree in payroll management in 2012. Victoria provides expert knowledge to payroll teams on statutory legislation, HMRC guidelines, payroll calculations including PAYE, NI, SMP, SSP, PAYE Settlement Agreements (PSA), aggregated earnings, year end reporting (P35, P14, P60, P11D) etc and terms and conditions of employees in order to complete an accurate and timely payroll.

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