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Child’s play? Vouchers versus tax free childcare

Childcare vouchers will close to new applicants on 4 October 2018. Here, tax specialist Craig Harman, from Perrys Chartered Accountants, explores the benefits of vouchers versus tax free childcare and offers his advice for families facing a financial conundrum.

As any parent knows, juggling the expense of childcare with other day-to-day living costs involves precision planning and a seemingly endless source of funds – particularly during school holidays when costs for childcare can soar.

So aside from working term-time only, and a fair amount of flexibility from employers, what other options are there for making sure childcare is as cost effective as possible?

One way to reduce the overall costs is by making sure you are claiming the relevant tax rebates for childcare. Currently these are available either as childcare vouchers or via the government’s new tax free childcare scheme. However, childcare vouchers will close to new applicants from 4 October 2018, so now is the time to work out whether you’ll be better off with vouchers before it’s too late.

Childcare vouchers – who’s eligible?

The good news is childcare vouchers could save you hundreds in tax payments per year and even better, there is no income limit applicable. However, the amount of tax you can save will depend on whether you are a basic-rate (20%), higher-rate (40%) or top-rate (45%) taxpayer.

Unfortunately, you can only claim childcare vouchers if your employer offers them so it’s important to check first before making any decisions. But, remember if you leave the company or stop claiming vouchers you will be unable to reapply after 4 October 2018.

If childcare vouchers aren’t available to you then it might be worth considering applying for the new tax free childcare scheme, which is open to anyone – great news if you are self-employed!

However, be aware there are restrictions on this new scheme based on minimum and maximum income levels. For example, if you are part of a couple then both parents must be working a minimum of 16 hours a week and paid at least minimum wage levels but should not be earning more than £100,000 per annum each.Childcare vouchers on the other hand have no minimum earnings level and can be claimed even if only one parent is working. This is because they are applied to an individual rather than based on a household like the new tax free childcare scheme.

The other benefit of childcare vouchers is they can be claimed up until your child is 15 (or 16 if the child is disabled). The new tax free childcare scheme can only be claimed until a child reaches the age of 11. However, just like childcare vouchers, if your child is disabled you can still claim until they reach 16.

What are the tax savings?

The actual tax savings depend on which scheme you are eligible for, how many children you have and what you pay in childcare costs. For example, with childcare vouchers there is a maximum gain of £915 per year, per parent whereas the tax free childcare scheme could provide you with £2,000 per child, or £4,000 if the child is disabled.

If you find you are eligible for both schemes, you should weigh up the pros and cons of each scheme and your individual circumstances before making any final decisions. If you are uncertain, it is always worth checking with a professional accountant or financial expert for advice. For more information you can also visit the government’s information page www.gov.uk/help-with-childcare-costs.