Tax-free childcare is a new government run scheme that will be available to 1.8 million households, providing additional support with the cost of childcare and offering greater security for working families.

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The new scheme was introduced by NS&I earlier this year and is set to replace the current voucher scheme by April 2018.

How does it work?

Under the new scheme, parents receive a 20p “top up” for every 80p contributed to the online account. This effectively gives you basic-rate tax back on what you pay.

The scheme will cover childcare costs of up to £10,000 per child (this figure is inclusive of the government contribution), with no further financial support available above this to cover outstanding childcare costs.

This means you would receive a government contribution of up to £2,000 per child (or up to £4,000 if the child has a disability) to help cover the costs of childcare with their registered care provider.

An example of how it works

If your childcare bill was £500 per month, you would pay £400 per month with the remaining £100 consisting of the government top-up. Over the course of the year, this would cut your £6,000 tax contribution to £4,800.

Am I eligible for the new scheme?

You will be eligible to apply for this scheme as long as your child is under the age of 12 (or 17 if receiving the disability allowance).

Unlike the previous scheme, the new system is not dependent on your employer offering it, which means self-employed individuals can also benefit from the new financial support offered.

The scheme is also available to parents on paid or unpaid sick leave and paid or unpaid maternity, paternity, and adoption leave.

I’m already receiving childcare vouchers

Parents registered on the childcare voucher scheme can continue to benefit from existing savings until they are no longer eligible under one of the following grounds:

  • they change employer or their employer no longer offers childcare vouchers;
  • their child reaches their 15th birthday (or 16th birthday if the child is disabled);
  • they do not receive childcare vouchers within a 12-month period; or
  • they choose to exit the scheme and open a TFC account with NS&I.

If you are considering switching to the new scheme, have produced a helpful infographic that outlines the differences.

How we can help

While tax-free childcare may initially seem like it will benefit you greatly with tax savings, other tax relief options like child benefit are likely to be more tax-efficient.

Our accountants can advise how to make the most of these options. If you are a freelancer, contractor or self-employed individual, we can also assist in setting up your limited company so you can benefit from further tax savings.

To learn more about the benefits of setting up a limited company and our fixed monthly rate accounting services, contact us today.