What is Tax-Free Childcare?
4th October 2018
By Esmée Hardwick-Slack
On October 4th 2018 the Government childcare voucher scheme will close to new applicants and be replaced by tax-free childcare (TFC), which is open to parents who meet the conditions and have one or more children aged eleven or under.
The previous voucher scheme allowed each parent to save up to £933 per year and is used by around 450,000 people. The scheme allows working parents the opportunity to swap part of their pre-tax salary to pay for registered childcare (including breakfast & after school clubs, childminders, day nurseries and some holiday schemes), as a result, they make savings on their Tax and National Insurance. Current users can continue to use Childcare Vouchers as long as they remain eligible, provided they don’t change employer.
The TFC scheme is an online savings account which you can open via the government’s Childcare Choices site. For every 80p you put into the account, the government adds 20p, this incentive is limited to £500 per three months and £2000 per year. The money in the account is used for approved childcare, which includes breakfast & holiday clubs, nurseries, childminders and childcare providers that are regulated by Oftsted. Unlike the previous scheme, TFC does not require employer backing.
To qualify for TFC as a couple, normally you would both have to be working (parental, sick or annual leave count as “working”). If one of you is employed and the other receives benefits, you may still be able to receive TFC. However, if you are self-employed and your partner does not work, then you will not be eligible for the scheme.
Each parent needs to be earning national minimum wage (NMW) or living wage but not exceed a total income of £100,000 per year. It doesn’t matter if your earnings vary, as long as over the three month entitlement period you average 16 hours per week at NMW/ living wage or more. However, if you recently started self-employment, you’re exempt from this earnings test for the first year.
If you already receive vouchers or subsidies for childcare from your employer, child or working tax credit, or Universal Credit, you can’t have a TFC account.