Andrew Bird contributed to the writing of this post
In early 2017 the Government will introduce a new Tax Free Childcare (TFC) scheme which is to replace the existing Employer-Supported Childcare Voucher (ESCV) scheme.
The new TFC scheme has been designed to provide working families with a 20% tax break on annual childcare costs of up to £10,000, providing savings of up to £2,000 per child per year (£4,000 for disabled children).
The TFC scheme will be administered by National Savings and Investments (NSI) and to be eligible to join employees must have:
- At least one child under 12 (17 if disabled) when the scheme starts in 2017
- Be employed (if a couple, both parents will need to be employed)
- Earn less than £150,000 pa (for couples, the combined salary must not exceed £150,000 pa)
- Not be claiming tax credits (this includes the childcare element of Working Tax Credit) or Universal Credit
Under the new scheme, eligible employees will only be better off if their childcare costs are higher than the amount shown below. For those parents with childcare costs lower than these amounts, they would be better off remaining in their ESCV scheme.
Level of monthly childcare costs after which tax-free childcare becomes the better option
|Single parent, basic-rate taxpayer||£389|
|Single parent, higher-rate taxpayer, joined childcare vouchers before 6 April 2011||£510|
|Single parent, higher-rate taxpayer, joined childcare vouchers after 5 April 2011||£260|
|Couple, both basic-rate taxpayers||£778|
|Couple, one basic-rate taxpayer, one higher-rate taxpayer who joined childcare vouchers after 5 April 2011||£649|
|Couple, both higher-rate taxpayers who joined childcare vouchers after 5 April 2011||£521|
Employees already in an ESCV scheme will be able to remain in the scheme providing their employer continues to run the scheme. Employees with children born after early 2017 will no longer be able to join ESCV schemes, meaning parents could have one child covered under an ESCV scheme and one child covered under the TFC scheme.
However, the TFC scheme has been purposely designed to benefit families with more than one child by subsidising 20% of each child’s childcare costs. By having children in separate schemes, employees would not be able to take full advantage of this saving.
Whilst there are significant savings to be achieved under the new TFC scheme, there are some disadvantages which employees should be aware off before deciding which scheme is best for them:
- Children will be covered up to 12 years old (17 if disabled). Under current ESCV schemes children are covered up to 15 (19 if disabled)
- Employees are responsible for setting up and managing their account with NSI
- Employees will need to revalidate their eligibility with the Department for Work and Pensions every quarter
For employers, the biggest implication of this new scheme is the loss of National Insurance Contributions (NIC’s). Currently, employers are able to take advantage of the significant NI savings gained through employees being in the company childcare scheme (providing they retain employees NIC’s). For larger companies a significant decrease in scheme membership could potentially have an impact on company budgets. It is due to this potential financial loss that it is recommended that employers’ undertake comprehensive reviews of their benefits mix to ensure they understand what the benefits bring to them as an employer.
"Under the new scheme, eligible employees will only be better off if their childcare costs are higher than the amount shown below. For those parents with childcare costs lower than these amounts, they would be better off remaining in their ESCV scheme"
As mentioned, employees will need to set up and manage their own TFC account which removes the onus from employers. However, employers are expected to remain a source of information for their staff about TFC, and the potential benefits it brings.
It is clear that the new scheme will not benefit everyone and it is therefore imperative that employees understand that they have a choice. The decision rests solely on an employee’s circumstances. We therefore believe employees, as well as employers, should have the most up to date information before the change comes in to effect.
This blog post was written by Carl Chapman. For further enquiries please contact Damian Stancombe, Head of Workplace Health and Wealth.