Childcare vouchers or Tax-Free childcare: which scheme is right for you?
Hundreds of thousands of working parents receiving childcare vouchers could lose out on tax savings worth thousands of pounds over the duration of their children’s schooling if they switch to the new government tax-free childcare scheme, according to Royal London.
The mutual insurer is warning that a family with two school-age children and two basic-rate taxpaying parents who both receive childcare vouchers could miss out by more than £10,000 between when their children are five and 16 if they switch from vouchers to tax-free childcare.
Royal London said parents who are currently eligible for vouchers should only swap to tax-free childcare if they have worked out that it is better value for their circumstances.
Becky O’Connor, personal finance specialist at Royal London, said: “Sometimes you don’t know what you’ve got ‘til it’s gone and that might well be the case for parents who lose or give up their entitlement to childcare vouchers.
“Families need to make sure they are not missing out on thousands of pounds in tax savings because of a complex and changing system. Those who work out they are better off on vouchers need to ensure they remain eligible by continuing to order them every year, or risk losing out on this great employee benefit forever.”
“But some help is better than none and if you find you are only eligible for tax-free childcare, make sure you claim it.”
For those parents who have a choice between childcare vouchers and tax-free childcare, the best option will depend on whether they are in a one-parent or two-parent family and whether they basic rate or higher rate taxpayers.
In particular, basic-rate taxpaying parents with school age children are more likely to lose out from losing their vouchers entitlement because of differences in the way the schemes are structured.
What are childcare vouchers?
The childcare voucher scheme is a UK government initiative aimed at helping working parents.
It allows employees to exchange part of their gross salary for vouchers, meaning it is tax-free and exempt from National Insurance contributions. The vouchers can be used to pay for most forms of registered and approved childcare such as nannies, before and after school clubs, childminders and nurseries.
But the government closed the voucher scheme to new applicants in October 2018. Only parents who were already receiving vouchers before this date are still eligible. Parents lose eligibility if they either leave their employer, fail to order vouchers within a 12-month period, or voluntarily switch to tax-free childcare.
Vouchers are a fixed pounds and pence yearly benefit to employees of participating companies, worth up to £933 per parent (basic rate taxpayer) or £625 per parent (higher rate) up to age 15.
What is tax-free childcare?
The tax-free childcare scheme was introduced in April 2017. Essentially, it gives eligible families 20 per cent off childcare costs. Parents open a centralised account and the government adds 20p for every 80p you pay in. You then pay your childcare provider from that tax-free childcare account.
Tax-free childcare is paid per child as a proportion of childcare costs, up to £2,000 a year until the child is 11, so the amount of benefit received depends on the amount of childcare used.
Tax-free childcare tends to work out as better value for: families with high childcare costs, families with more than two children, and self-employed parents who cannot access childcare vouchers.
Where there’s a choice, who is better or worse off on childcare vouchers when paying typical after-school and holiday club costs (£3,500 per child) from age 5-16?
|Two-child family has…
|Better off on vouchers or TFC?|
|Two basic rate taxpayer parents with vouchers||Vouchers|
|One basic-rate parent with vouchers||Vouchers|
|Two higher rate parents with vouchers||Vouchers|
|One higher rate parent with vouchers||Tax-Free Childcare|