Childcare Vouchers vs Tax-Free Childcare: the Winners and Losers

February 5, 2016

Childcare Voucher Scheme to end in 2017

The Childcare Voucher scheme, introduced by the government in 1989, is due to end in 2017, to be replaced by the Tax Free Childcare allowance. Whilst this is excellent news for some parents, others are likely to find themselves worse off. But who are the winners and losers?

The current Childcare Voucher scheme allows parents or legal guardians to pay for childcare from their pre-tax salary—in a system known as salary sacrifice, which is administered by employers on the behalf of the government. Since the transaction is pre-tax, parents gain financially by receiving a higher face value of childcare vouchers than they would otherwise have received in salary. In other words, £1000 of pre-tax salary buys the same value of childcare vouchers, instead of being worth around £700 after tax and National Insurance deductions—thus making a saving of around £300 for a basic-rate tax payer. Parents can then use these vouchers pay for Ofsted-registered childcare for children up to the age of 15 years—or 16 years for children with disabilities. However, there are restrictions on the use of vouchers, which are determined by the number of working parents rather than the number of children. For basic-rate tax payers, voucher payments are restricted to £243 per month for one working parent and £486 per month for two. The same figures also apply to higher and top-rate tax payers who joined the scheme before 5 April 2011, provided their payments have continued for more than 12 months. However, higher and top-rate tax payers who joined the scheme after the 5th of April 2011, have a reduced allowance of £28 and £25 per week, respectively. In order to qualify, all parents or legal guardians must work for at least 35 hours per week and earn a minimum salary of £11,485 per year. However, as a notable exception, the scheme doesn’t support families in which both parents are self-employed.

The latest government scheme, which is due to launch in early 2017, is known (somewhat confusingly!) as Tax-Free Childcare. Under the new scheme, parents and legal guardians, as well as grandparents and other donors, will be able to save money for childcare by paying funds directly into a newly-created Childcare account, which is to be administered online. Families will then receive a 20% contribution from the government, up to a maximum of value of £2,000 per year per child—or £4,000 for children with disabilities. Thus, in contrast to Childcare Vouchers, government contributions have an upper limit that increases in proportion to the number of children in a family. However, there is a catch, as in order to qualify, both parents (in two parent families) need to be working and earning at least £100 per week. High-income families, with at least one salary exceeding £100,000 per year, will also be excluded; and, in contrast to Childcare Vouchers, the scheme will only fund Ofsted-registered care for children up to the age of 12 years—or 17 years, for children with disabilities.

Who are the winners and losers?*

The beneficiaries of the new Tax-free Childcare scheme will be higher-rate tax-payers, earning £42,385 to £100,000 per year—provided their childcare costs exceed £6,252 per year. The new scheme will also benefit families in which both parents are self-employed, and earning less than £100,000 each per year. Other beneficiaries include larger families with high childcare costs (greater than £9,336 per year)—since the upper limit for government support is determined by the number of children.

Unfortunately, there are also losers, the most obvious being two-parent families with only one working parent. However, many basic-rate tax payers will also be worse off under the new scheme, if their total childcare bill is less than £9,336 a year—irrespective of the number of children they have. High-income families (with at least one salary exceeding £100,000 per year) will also be worse off, as these parents will no longer qualify for support.

What Action Should I Take?

For parents who may lose out, the good news is that the current Childcare Voucher scheme will continue to run until early 2017, and it’s not too late to sign up—provided your employer is happy to administer the scheme and you already have a child! Once enrolled, parents will then be free to continue with the Childcare Voucher scheme for as long as their employers are able to offer it.

Implications For Nannies

The introduction of Tax Free Childcare in 2017 may offer potential benefits to Nannies, provided they are registered with Ofsted. With the extension of financial benefits to higher earners, the demand for Ofsted-registered Nannies is likely to increase. Therefore, 2016 might be a great time to get yourself registered. Please contact Harmony at Home for further help or advice

*Data from:

Rob Hodgkison, Harmony at Home Ltd. All Rights Reserved, 2016

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Posted by Harmony at Home Head Office Team | Filed Under Expert Advice