Tax-Free Childcare and Childcare vouchers are both schemes designed to help with childcare costs. In most cases they are only useful if your income is too high to benefit from Tax Credits and Universal Credit. Childcare Vouchers are no longer available to new applicants, so this article is only relevant if you already get childcare vouchers and are considering whether to switch to tax-free childcare.
Tax-free Childcare is a government scheme introduced in 2017. Eligible parents can open a childcare account which is topped up by the government to cover 20% of childcare costs. Tax-Free Childcare was introduced as an alternative to Childcare Vouchers where employers offer vouchers to pay for childcare based on a salary sacrifice scheme. Childcare Vouchers allow you to avoid paying national insurance and income tax on the proportion of your income that is spent on childcare. At present you can choose whether to use Tax-Free Childcare or Childcare Vouchers. It is not possible to use both schemes at the same time and if you have a partner, you and your partner must both use the same scheme. If you or your partner already get childcare vouchers, you can continue receiving vouchers as long as:
- you stay with the same employer and they continue to run the scheme
- you don’t take an unpaid career break of longer than a year
- you don’t switch to the childcare voucher scheme.
What are the main differences?
|Childcare Vouchers||Tax-Free Childcare|
|Childcare Vouchers are administered by your employer and not all employers offer the scheme.||Tax-Free Childcare is administered by the government and does not involve your employer.|
|Childcare Vouchers are available to parents with children under 16 (or 17 if disabled).||Tax-Free Childcare is available to parents with children under 12 (or 17 if disabled).|
|Childcare Vouchers allow each parent to not pay some income tax and national insurance. The money you save depends on when you joined the scheme and whether you are a basic, higher rate or additional rate tax payer.||Tax-Free Childcare offers a flat rate saving of 20% of childcare costs with a maximum government top-up of £2000 per year per child.|
|Childcare Vouchers can be used together with Tax Credits or Universal Credit, but most parents who are eligible for Tax Credits or UC are better off not using the scheme.||Tax-Free Childcare cannot be used if you are receiving Universal Credit or Tax Credits. Applying for Tax-Free childcare will immediately end your Tax Credit claim, and you will not be eligible for Tax-Free Childcare if you get UC.|
|Not available for new applicants after October 2018.||Tax-Free Childcare will continue to be available for the foreseeable future.|
Which scheme will make me better off?
The government has an online calculator which will work out how much you can save on childcare costs. It compares Childcare Vouchers, Tax-Free Childcare and Tax Credits. It does not compare Universal Credit, so you should separately check your entitlement to that (bearing in mind that you cannot use tax-free childcare and UC, and claiming UC will stop your tax credits and other benefits replaced by UC). Most parents who are eligible for Tax Credits or Universal Credit are better off not using Childcare Vouchers or Tax-Free Childcare.
The Low Incomes Tax Reform Group website has lots more information about both the childcare voucher and tax-free childcare schemes.
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