The future of child free tax care
The 2013 budget presented changes to the tax relief around childcare. On the face it appears great savings can be made (and for some that will be the case, in time) but when looking at the detail many employees and employers may well in fact be better off with the current scheme.
What is the current position?
Currently tax breaks for childcare are available only by employer-run schemes. Employers currently can offer tax and NI free childcare payments or vouchers rather than parents paying childcare costs from their taxed salary.
From April 2013 the limits are:
- Basic (20%) Taxpayer- £55/week vouchers, max annual gain £930.
- Higher (40%) Taxpayer- £28/week voucher, max annual gain £630.
- Top (45%) Taxpayer- £25/week voucher, max annual gain £590.
It is important to note that the number of children you have doesn’t impact this; the limits are the same whether you have one child or more. Obviously, it does vary depending on the rate of tax you pay.
What is on the horizon?
The childcare voucher scheme has been around a while but from April 2015 there is to be a new option, tax free childcare (TFC) which will be available to almost all working parents who pay for childcare. The TFC will be introduced on a phased approach however, parents and employers will still have a choice on how best they can benefit.
The Chancellor suggested that TFC was a more beneficial option for parents but perhaps not for employers. Although more recently calculations show the current scheme can actually be just as beneficial for parents in a wide variety of circumstances and the existing scheme will be available still for a number of years.
The deal for employers
By issuing childcare vouchers or payments to employees, the employer gains from not having to pay Employers NI on the value of the vouchers/payments. This is a good enough reason why employers should continue with the existing scheme for as long as possible.
The deal for employees (mums and dads)
There are certain criteria relating to the new scheme that need to be taken into consideration.
1) Until April 2016, TFC will only apply to parents with children under five. Each year this limit will increase by one year until it becomes available to all parents with children under twelve.
2) The maximum combined tax and NI saving is 20% of the total childcare costs
Broad figures suggest that this would be in the region of £1,200 per year, but that this would be a maximum that couldn’t be exceeded.
Summary & tips
For employers it seems the path is clear. However, for employees there are considerations such as number of children, the age of the children and whether the parents are higher rate tax payers or not. Here are some broad tips for consideration:
EMPLOYERS – Employers can continue to use the benefits of the existing scheme until April 2015. It is therefore advised in order to maximise tax savings related to Employers NI, that employees are invited onto the scheme before that date. Once on the scheme they are then able to remain on the scheme until they cease to become eligible or make the choice to switch to TFC.
EMPLOYEES – Parents should calculate their entitlements from the current scheme and from TFC for their own specific circumstances to ensure they are getting the best deal. This needs to be done before April 2015, and kept an eye on following this date for when it may be beneficial to “opt out” of the employers own scheme and take advantage of TFC.
Generally, parents with one child or relatively low childcare costs will save more tax and NI under the current scheme and as long as they are signed up before April 2015 they can stay until they decide to leave.
COUPLES – Generally, couples paying tax at the basic rate with two or more children will benefit from TFC. This is subject to qualifying and subject to childcare costs being above c£9,000 per annum.