New tax-free childcare scheme goes online early 2017

For a number of years now HM Revenue and Customs have tinkered with various initiatives to provide tax relief for the childcare costs incurred by families. For working parents, the relief available can be a valuable increase to their take home pay.

The Government is launching a new tax-free childcare scheme, now scheduled to be introduced early 2017. The new scheme will eventually replace the existing relief for employer supported childcare and childcare vouchers, which will be phased out.

The new scheme

• This is a government scheme available for children up to the age of 12, or, where the child is disabled, up to the age of 17
• Parents must open an online account in which they deposit money to be used to meet childcare costs
• The Government will then top up the account with £2 for every £8 paid in by the parents. With a maximum top up per year of £2,000 per child, or £4,000 where the child is disabled
• The top-up is tax-free regardless of the parent’s marginal rate of tax
• However, only working parents with annual earnings between £15,000 and £100,000 will be eligible
• Only regulated and approved childcare providers will be able to receive payments from the online account and they will have to sign up online.

The plan is to introduce the scheme to those parents with the youngest children first and gradually phase it in so that all eligible families can benefit by the end of 2017.

Existing rules

Currently, relief for childcare costs can only be obtained through the employer who can provide employer-supported childcare or childcare vouchers. Thus, with the current system, the burden is on the employer and at their discretion as to whether they offer a scheme to employees hence not all families benefit. The amount of tax relief given has changed over the years and depends when a scheme was joined. Employers may also offer a salary sacrifice scheme which can be beneficial for both employer and employee.

The transition to the new scheme

The new scheme will be rolled out throughout 2017 with full implementation by the end of next year. However, to ease the transition, existing schemes will remain open to new participants until April 2018. Parents will have the choice of whether to continue with the existing scheme until it closes or move to the new scheme.

Whether it is worth making the switch will depend on individual circumstances and the taxpayer’s marginal rate of tax. It will be necessary to do the sums to ensure the maximum amount of tax relief is obtained.