Chancellor announces new tax-free childcare scheme from autumn 2015

New arrangements for tax-free childcare to come into effect from September 2015 were announced in 2013. The 2014 Budget has set out much more detail about the scheme which will provide savings of up to £2,000 per child, cover annual childcare costs of up to £10,000 per year and will apply to families with children under 12 within the first year.

Described as Tax-Free Childcare, the government claims it will extend support compared to the current childcare voucher scheme, though those who are in the present Employer Supported Childcare voucher schemes and wish to continue after 2015 will be able to do so, provided they stay with the same employer.

While the details have received support from those looking to address the high cost of childcare, some groups have criticised the limitations of a scheme that expects both parents in a couple to be in work, and which does not address the savings for childcare costs through employer-supported vouchers which assist families even when one parent is not at work.

There is concern about the bureaucracy involved in setting up an account with the scheme for cash to be paid into, rather than receiving the savings as a rebate through the tax system. There has also been disappointment that the proposals offer working parents no immediate help.

In general, parents will only be better off under the new scheme if their childcare costs are higher than the figures shown below.

Single parent, basic-rate taxpayer = £ 389

Single parent, higher-rate taxpayer, joined childcare vouchers before 6th April 2011 = £ 510

Single parent, higher-rate taxpayer, joined childcare vouchers after 5th April 2011 = £ 260

Couple, both basic-rate taxpayers = £ 778

Couple, one basic-rate taxpayer, one higher-rate taxpayer who joined childcare vouchers after 5th April 2011 = £ 649

Couple, both higher-rate taxpayers who joined childcare vouchers after 5th April 2011 £ 521

Nonetheless, the scheme will extend tax savings and eligibility to a wider group of working parents. This is likely to lead to a significant reduction in the use of childcare vouchers. As the new scheme does not provide any national insurance savings, this will affect employers who participate in Employer Supported Childcare voucher schemes and so make savings on their national insurance contributions for each participating employee. For some employers this will be a significant loss, which could have an effect on the amount which they have available to spend on other employee benefits.

So whilst the new childcare subsidy will be very welcome for some parents, it is clear that parents facing the costs of childcare have still not got a simplified solution from the government.

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