Childcare is expensive; however, the tax system can provide a helping hand. In recent years, there has been a shift from tax relief for employer-supported childcare and vouchers to a Government top-up scheme.
The Government operates a tax-free childcare scheme whereby parents deposit money into an account that can be used to meet childcare costs and the Government provide a tax-free top up.
To qualify for the scheme, the parent (and their partner if they have one) must each expect to earn at least £1,853.28 over the next 3 months. This is equivalent to 16 hours a week at the National Living Wage of £8.91 an hour. However, if either the claimant or their partner expects to have adjusted net income of more than £100,000 in the current tax year, they cannot benefit from the tax-free top up.
Eligible parents can access the tax-free top up by setting up an online childcare account for their children. For every £8 that is deposited into the account, the Government will add a further £2, to a maximum of £2,000 a year (or £4,000 a year where the child is disabled). The funds can be used to provide approved childcare, including that provided by childminders, nurseries, nannies, after-school clubs, and playschemes, as long as the provider has signed up to the scheme. The care can be provided until the September after the child’s 11th birthday (or up to the child’s 17th birthday if the child is disabled).
The Government top-up scheme is not available to universal credit claimants, and cannot be used in addition to employer-provided vouchers or employer-supported care.
Employer-supported Childcare and Childcare Vouchers
Where an employee joined their employer’s childcare or childcare voucher scheme on or before 4 October 2018, they can continue to benefit from the associated tax relief while their employer continues to operate the scheme. Childcare vouchers and/or employer supported childcare are tax-free up to the employee’s exempt amount. Where the employee is a basic rate taxpayer or joined the scheme prior to 6 April 2011, the exempt amount is £55 per week. Otherwise the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer. The exemption also applies for National Insurance purposes. Employees only have one exempt amount for employer-supported care and vouchers and regardless of the number of children that they have.
It is also possible for employer-provided childcare and childcare vouchers to be made available under a salary sacrifice scheme without triggering the alternative valuation rules.
No tax charge arises under the benefit in kind rules where childcare is provided in a workplace nursery. Unlike the exemption for employer-supported care and vouchers, there is no cap on the value of childcare that can be provided tax-free in a workplace nursery. However, there are stringent conditions that must be met for exemption to be forthcoming.
Which is Best?
Where a parent could potentially benefit from more than one scheme, they should evaluate the options can choose the one best suited to their needs. Employees in an employer-supported scheme or employer voucher scheme will need to leave that scheme if they sign up for the Government scheme, and will not be able to re-join the employer’s scheme if they change their minds.
Partner note – ITEPA 2003, ss. 318 – 318D; www.gov.uk/tax-free-childcare