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Tax-free childcare

By: Medical Team Date: 23 November 2016
Category: Medical,Tax

HM Revenue and Customs (HMRC) has announced further details of the new tax-free childcare scheme, which is to be introduced in 2017.

Who is eligible?
To be eligible, families will have to have all parents in work, with each expecting to earn at least £115 per week but less than £100,000 a year, and not be already receiving support through Tax Credits or Universal Credit.

The scheme will be available for children up to the age of 12 (or up to 17 for children with disabilities).

The new childcare scheme is open to self-employed parents (as well as employees), who will be able to get support with childcare costs, unlike the current scheme (Employer-Supported Childcare) which is not available to self-employed parents. To support newly self-employed parents, the government is introducing a ‘start-up’ period. During this, self-employed parents will not be required to earn the minimum income level.

How does the scheme work?
You will be able to open an online account, which you can pay into to cover the cost of childcare with a registered provider.

HMRC are asking childcare providers to register for the scheme as soon as possible. Only childcare providers registered with a regulator (such as Ofsted) can receive Tax-Free Childcare payments.

The government will top up the account with 20% of childcare costs up to a total of £10,000 - the equivalent of up to £2,000 support per child per year (or £4,000 for disabled children).

Parents and others (such as grandparents, other family members or employers ) can pay money into their childcare account as and when they like. This means you can build up a balance in your account to use at times when you need more childcare than usual, for example, over the summer holidays.

If your circumstances change, or you no longer want to pay into the account, then you will be able to withdraw the money you have built up. If you do, the government will withdraw its corresponding contribution.

When will the scheme be launched?
Tax-free childcare will be launched from early 2017. The scheme will be rolled out gradually to families, with parents of the youngest children able to apply first. Parents will be able to apply for all their children at the same time, when their youngest child becomes eligible. All eligible parents will be able to join the scheme by the end of 2017.

What if you currently receive Employer-Supported Childcare?
The new scheme has been introduced to replace the existing system of employer-supported childcare (ie Childcare vouchers), which currently provides income tax and national insurance contributions (NIC) relief to employees. The maximum relief is an exemption from income tax and NIC of £55 a week for a basic rate taxpayer, £28 a week for a higher rate taxpayer and £25 a week for an additional rate taxpayer. This relief is per employee, so if both parents are in employment the maximum exemption is £110 per week (for basic rate taxpayers). In the new scheme the limit is per child.

The current system of employer-supported childcare will continue to be available for those who are already members, if they wish to remain in it, or they can switch to the new scheme. Employer-supported childcare will continue to be open to new joiners until April 2018.

The government will make more information available, including details of how parents can sign up, later this year.

If you have any questions, please do contact us.
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