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Govt’s childcare scheme flops in first year

Written by: Danielle Levy
The new tax-free childcare scheme has been labelled 'a flop' after figures reveal the government paid 'top ups' to 50,000 families, far below its original estimates.

The government’s contribution towards tax-free childcare accounts totalled £32m, which equates to less than a tenth of its £390m estimated spend during the scheme’s first year.

The government’s initial estimate was based on 1.5 million families being eligible, receiving an average yearly top-up payment of £800 per child.

Parents using the new tax-free childcare accounts receive 20% from the government on whatever they put into the account, up to a maximum top-up of £2,000 a year per child.

Childcare accounts were introduced in April 2017 for families with children aged 3 or under. The scheme was then rolled out to older age groups and became available to all eligible families from February 2018.

The government hoped a larger number of parents would be able to access the tax-free childcare scheme in comparison to the previous childcare voucher system, which was only available to parents employed by companies which offered them.

Those who previously received vouchers can continue to use them for as long as they are offered by their employer. However, new applicants have not been able to receive vouchers since October 2018.

When the government announced the launch of its tax-free childcare scheme back in 2017, it estimated that it would cost £390m in its first year. However, figures from HMRC shows the government spend on top-up payments totalled a meagre £32m over the year to the end of March 2018.

This went towards 50,000 tax-free childcare accounts – far below the 1.5m that was initially estimated by the government.

Those losing out

The figures suggest that so far the average top-up per child is £640 – £160 a year less than anticipated.

Royal London points out that for a basic-rate taxpaying, working couple with two children in receipt of childcare, this is around £600 a year less than the savings they could have made on the old childcare voucher scheme.

According to the insurer’s calculations, tax-free childcare for a family in this bracket would have delivered an average £1,280 for the year in 2017/18, based on HMRC’s figures. This compares to £1,866 in tax and national insurances savings on childcare vouchers over the same period.

Becky O’Connor, personal finance specialist for Royal London, commented: “The scheme was hailed as the solution to unaffordable childcare for 1.5 million families, but it is failing to reach them.

“For those it is reaching, it is significantly less generous than the voucher scheme it is replacing, delivering around £600 a year less in savings for a family with two basic-rate taxpaying parents and two children.”

The beneficiaries

Royal London estimates that the winners of tax-free childcare are the self-employed or anyone employed by a business which does not offer childcare vouchers.

Single parents, families with a large number of children, families with disabled children (who receive a top-up of 40% rather than 20%) or families with particularly high childcare costs should also benefit more from the new accounts system.

However, for basic-rate taxpaying parents whose employers still offer the vouchers, estimated at around 600,000 families, the old scheme is far more financially beneficial. It delivers income tax and National Insurance savings on vouchers worth £243 a month for basic rate taxpayers and £124 a month for higher rate taxpayers.

What’s more, this scheme is available until a child is 15, rather than 12 – the age limit for tax-free childcare accounts.

A Freedom of Information Act by Royal London made in November 2018 found that only 20,000 parents who use the new tax-free childcare accounts have swapped away from childcare vouchers.

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