Tax-Free Childcare: What does this actually mean?

Tax-Free Childcare (TFC) has fast become a hot topic for employers and employees. Replacing the existing Childcare Voucher scheme in April 2018, Tax-Free Childcare will be available to 1.8 million households – providing additional support with the cost of childcare and offering greater security for working families.

But, how does Tax-Free Childcare work? How does it differ from the existing Childcare Voucher Scheme? And what does it mean for employers and employees?

To help answer some of your questions on TFC, we’ve created a short guide on the scheme.

When will the scheme launch?

Early 2017

Who will manage the scheme?

National Savings and Investments (NS&I)

How is the money paid?

Parents will administer Tax-Free Childcare directly with NS&I, rather than their employer. Parents will be able to open an online account, which they can pay directly into to cover the cost of childcare with their chosen registered provider. The online accounts will be available through the government website (Gov.UK).

How much will the government contribute?

For every 80p paid into the account, the government will add an additional 20p. The 20p top-up is equivalent to the tax most people pay (20%), which is reflected in the scheme’s name ‘Tax-Free’.

Up to £10,000 can be paid into the account in total. This includes up to a £2,000 (20%) contribution from government (or £4,000 for disabled children).

What is the eligibility criteria for Tax-Free Childcare?

To qualify, parents must be in work, earning just over an average of £50 per week and not more than £150,000 per year.

What happens if I’m self-employed?

Unlike the current Childcare Voucher scheme, self-employed parents are able to gain support with childcare costs through the Tax-Free Childcare scheme. If you are newly self-employed, you will be exempt from the minimum income level during a ‘start-up’ period to help ease the transition.

The scheme will also be available to parents on paid sick leave and paid and unpaid statutory maternity, paternity and adoption leave.

Does the new scheme apply to children above nursery age?

The scheme is available for children up to the age of 12. It will also be available for children with disabilities up to the age of 17.

What will happen to the existing Childcare Voucher scheme?

The current Childcare Voucher scheme will be closed to new joiners from early 2017, and new parents wishing to join will be enrolled on the TFC scheme.

What if I’m already registered on the existing Childcare Voucher scheme?

Parents registered and saving on the existing Childcare Voucher scheme can continue to do so until they are no longer eligible under one of the four following grounds:

  1. They change employer or their employer no longer offers Childcare Vouchers.
  2. Their child reaches their 15th birthday (if your child is disabled, this will be extended until their 16th birthday).
  3. They do not receive childcare vouchers within a 12 month period.
  4. They choose to exit the scheme and open a TFC account with NS&I.

What happens if I use a workplace nursery?

Employers’ Workplace Nurseries are not affected by the new TFC scheme.

As an employee, am I better off on the new scheme or existing Childcare Voucher scheme?

Some parents will make greater financial savings on the existing Childcare Voucher scheme, while others will make greater savings by switching to the new TFC when it comes into effect.

If you have the choice between schemes and to find out which will provide greater savings for your family, a Childcare Savings Calculator can be found at the following link

What happens once I’m registered on the new scheme?

Once you are registered, you are able to pay into your childcare account as and when you like. Other family members, friends and employers can pay into the account too if they wish.

You can also build up the balance in the account for times when you may need additional support with childcare.

How much administration is involved?

Your online account will hold additional details about you and your work. You will be required to re-confirm your information every three months on your online account.

What happens if I want to withdraw money from my account?

If you have paid more than intended or you wish to withdraw money from the account, you will be able to do so. The government will also withdraw its corresponding top-up contribution.