Prior to October 2018, employers could provide childcare vouchers of up to £234 per month to put towards employees childcare costs. Since October 2018 this was no longer open to new applicants and instead replaced by the Tax-Free Childcare Scheme.
Unlike the prior scheme, which was open only to employees, the Tax-Free Childcare Scheme can also be used by sole traders.
Tax-Free Childcare can be used for childminders, nurseries and nannies, but also:
- after school clubs;
- holiday clubs;
- play schemes; and
- holiday clubs.
What is the Tax-Free Childcare Scheme?
The Tax-Free Childcare Scheme was rolled out to families and unlike the Childcare Voucher Scheme before it, is open even if the employer is not registered.
Under the scheme, individuals will get 20% of their costs paid for by the government. You can get up to £500 per child per quarter, and £2,000 in a year but you are responsible for any costs over £10,000 per annum. This works out at the value of every 80p you pay in, the government will top up with 20p.
How to qualify for the Tax-Free Childcare Scheme
In order to qualify for the scheme, you must meet the following criteria:
- Have one or more children under the age of 11 (or 16 if the child is registered disabled)
- Earn at least £2,643.68 before tax every 3 months (equivalent to 16 hours per week at NMW.) For sole traders who do not expect to earn the minimum amount over 3 months, you can show that your yearly earnings will bring this average up.
- Earn less than £100,000 per year.
If you’re a sole trader who started your business less than 12 months ago, you do not need to meet the government’s minimum earning limit.
Payments made to providers who are not eligible will not receive tax and National Insurance exemptions. If the childcare provider is a relative then, broadly speaking, they must be a registered provider and the care must be provided outside of your home. The rules regarding this do vary slightly depending on which country of the UK you live in.
What if I already receive childcare vouchers?
If you are already enrolled in the old Childcare Voucher Scheme, nothing will change.
How to apply for the Tax-Free Childcare Scheme
You can apply for the Tax-Free Childcare Scheme online. You will just need to provide the following information:
- Your National Insurance number,
- Your Unique Taxpayer Reference,
- Your partner’s details (if applicable),
- The UK birth certificate reference number (if you have one) of any children you’re applying for, and
- The date you started or are due to start work (this can be approximate if more than 3 months ago.)
How is Tax-Free Childcare paid?
Once your account is open, you can pay into it via direct debit, a bank transfer or a standing order as and when you need. You will pay 80% of the total costs per child into your account and the government will subsidise the other 20% directly. The funds in the account can then be used to pay towards your childcare costs.
You can withdraw the money you have accumulated throughout the financial year, but if this is used for a cost other than for childcare, the government will take away their contribution.
If you’re still unsure what’s best for you, one of our expert accountants can advise.