Childcare Voucher Scheme verses Tax-Free Childcare: Before Time Runs Out – Which is Best?

Employer provided childcare voucher schemes will close to new entrants from 4 October 2018 and are being replaced by Tax Free Childcare. But which is the best option?

Below we run through some of the key aspects and variations between the two schemes

Existing Employer Provided Childcare Schemes

Existing employer provided childcare schemes have tax and NIC advantages for both employees and employers.

Schemes included the childcare voucher schemes but also directly contracted childcare schemes, under which the employer pays the childcare provider directly.

Under the childcare voucher scheme the value of the vouchers is deducted from the employee’s gross salary prior to tax and NIC being applied.

The limits in terms of the vouchers you can buy depend on what level of income you earn:

  • Basic-rate (20%) taxpayer – £55 per week voucher giving a maximum tax and NIC saving of £933
  • Higher-rate (40%) taxpayer – £28 per week voucher giving a maximum tax and NIC saving of £625
  • Top-rate (45%) taxpayer – £25 per week voucher giving a maximum tax and NIC saving of £623

The vouchers can be claimed up to the youngest child’s maximum age of 15 but the amount you receive is the same whether you have one or more than one child.

As the name implies, this is only available to employees, and not the self-employed, and only if your employer offers the scheme.

You can keep using the childcare voucher scheme if you’ve joined a scheme and your wages have had the necessary deductions before the scheme closes on 4 October 2018, as long as:

  • You stay with the same employer and they continue to run the scheme
  • You do not take an unpaid career break of longer than a year

Tax-Free Childcare (TFC)

The TFC scheme offers working parents up to a maximum of £2,000 per child per year (or £4,000 for disabled children). Therefore by saving a maximum of £8,000 per child in to the scheme the parents would have the maximum £10,000 per child for childcare costs. So unlike the employer provided childcare voucher scheme the help available goes up with the number of children.

The scheme is available to both the employed and self-employed, but if a couple both parents must be working.

The scheme is only available for parents with children under 12 (with the child ceasing to be eligible on 1 September following their 11th birthday).

There are, however, income level rules with the scheme not being available if the income of a parent or their partner is more than £100,000 and there is also a minimum income threshold.

You cannot continue to claim childcare vouchers if you successfully apply for TFC and you must tell your employer within 90 days if you enrol in TFC, They will then stop giving you new vouchers.

Choosing the Most Favourable Option

While some people will be better off under the TFC scheme, other may find they are better off with the current scheme. And the interaction between the current employer-provided schemes, TFC and the childcare elements of tax credits and universal credit is complex.

The Childcare Choices website includes a calculator to allow parents to check which of the various childcare schemes is most favourable in their particular circumstances. However, this does not necessarily deal with all the options or with more complex cases.

Careful analysis of the best option is essential, and our payroll specialists at MT Pay can help you review the position. Call them today on 01775 711333 or email payroll@mooret.co.uk

Posted in Payroll Press Articles.