From the 2017/2018 tax year which starts on 6th April 2017, new regulations governing some benefits and childcare payments will come into force. The ‘Employer Supported Childcare’ of salary sacrifice for Childcare Vouchers is being phased out, to be replaced by a completely new ‘Tax Free Childcare’ system.
This may lead to some initial confusion as the two systems will run side-by-side for a while. It is important that you are aware of the upcoming changes now, so that you can investigate the impact on your childcare costs.
Two things that remain the same:
- Officially registered childcare providers can be paid through both schemes (Ofsted, Early Years Register, Childcare Register)
- Employer provided free workplace nursery places remain a tax-free benefit
Old childcare system
‘Employer Supported Childcare’ allows employees to sacrifice a proportion of their salary for childcare vouchers provided by their employer. It is administered through PAYE, based on an initial Basic Earnings Assessment done at the beginning of the tax year. This calculates the marginal tax rate for the forthcoming year and, by correlation, how much weekly childcare vouchers will be worth.
At the moment this stands at; £25 for 45% Additional Rate taxpayers, £28 for 40% Higher Rate taxpayers and £55 for 20% Basic Rate taxpayers. Self-employed taxpayers are unable to claim Childcare Vouchers.
Eligible employees can claim Childcare vouchers for their offspring until they reached 15 years old. It is possible to claim Childcare Vouchers and Child Tax Credit. Your partner’s employment status does not matter, as long as you (the claimant) are working, you can claim for Childcare vouchers. Employer Supported Childcare is related to the parent, so divorced or separated parents can both claim childcare vouchers for the same child. The scheme closes to new and re-joiners in April 2018.
New childcare system
‘Tax Free Childcare’ (TFC) is a completely different kind of system that is entirely separate from your employer. This does mean that self-employed taxpayers will be eligible. You must set up a Joint Online Childcare Account (JOCA) and for every £8 you put in the account, the government will add £2. This goes up to a maximum of £500, every quarter, for each of your children. This is doubled for children with disabilities.
Taxpayers will manage their own online account and ‘re-confirm’ every three months. It will also be your responsibility to tell your employer, in writing, that any Employer Supported Childcare must cease. You must do this within 3 months of opening your JOCA.
TFC applies to children up to the age of 12 (three years less than the Childcare Vouchers), or 17 years of age for children with disabilities.
If you are in a partnership (including marriage), both members must be working at least 16 hours per week and earn at least minimum wage. This means both biological parents, a single parent or biological parent and their partner.
If the household income is over £100,000, then you are not eligible for TFC. This means that even if only one partner earns over £100,000, you cannot apply.
Important change
A crucial change is that Tax Free Childcare is worked out per child, not per parent. This means that when the child belongs to two separate households because of separation or divorce, only one of these families can claim. You will have to relinquish your Child Tax Credits in order to get Tax Free Childcare. This is a potential loss of £545 from your annual income, which is why you must carefully consider which path is best for your circumstances.
30 hours free childcare
Currently all three to four year olds in England get 570 hours a year or 15 hours a week of free childcare. From September 2017 if you are a parent who is living and working in England you may be entitled to 30 hours of free childcare. This could equate to an extra 570 hours (total 1140 hours) of free childcare in comparison to the old scheme.
Self employed
Self employed taxpayers will have a start-up ‘cushion’ of time, during which the minimum earnings amount will not be enforced.
Can I get my money back out of this account?
Yes, you can take your money out whenever you want and the government will withdraw their corresponding contribution.
Do I have to switch?
Before the 6th April 2018, parents can join or re-join a Childcare Voucher scheme. After 6th April 2018, no more people will be accepted to the scheme, even if they were previous members.
Bear in mind that all of your children will have to be within the same scheme. You cannot have one child with Childcare vouchers and another with TFC.
Impacts
There will be substantial impacts on both employers and employees when the new rules are fully rolled out.
Employers’ pension contributions will rise in line with the decrease of salary sacrifice. This, along with the Apprenticeship Levy, currently saves employers 14.3%. Many employers may suddenly start persuading their employees to join a ESC scheme before the cut-off date in 2018, to make the most of their National Insurance saving.
As numbers fall, it makes sense for employers to ditch their childcare voucher scheme providers in favour of in-house administration, or at least to find a cheaper option.
Employees
Every employee will need to work out the best course of action for their individual circumstances. The government is providing a calculator to help taxpayers figure this out. There are lots of issues involved that can affect your overall household income. For example, bringing in extra taxable income could put you in line to get the high income child benefit charge, which puts some child benefit back into the Treasury’s purse.
