Tax free efficient childcare

Childcare is expensive; however, the tax free system can provide a helping hand. In recent years, there has been a shift from tax relief for employer-supported childcare and vouchers to a Government top-up scheme.

Government scheme

The Government operates a tax-free childcare scheme whereby parents deposit money into an account that can be used to meet childcare costs and the Government provide a tax-free top-up.

To qualify for the scheme, the parent (and their partner if they have one) must each expect to earn at least £1,853.28 over the next 3 months. This is equivalent to 16 hours a week at the National Living Wage of £8.91 an hour. However, if either the claimant or their partner expects to have adjusted net income of more than £100,000 in the current tax year, they cannot benefit from the tax-free top-up.

Eligible parents can access the tax-free top-up by setting up an online childcare account for their children. For every £8 that is deposited into the account, the Government will add a further £2, to a maximum of £2,000 a year (or £4,000 a year where the child is disabled).

The funds can be used to provide approved childcare, including that provided by childminders, nurseries, nannies, after-school clubs, and playschemes, as long as the provider has signed up to the scheme. The care can be provided until the September after the child’s 11^th birthday (or up to the child’s 17^th birthday if the child is disabled).

The Government top-up scheme is not available to universal credit claimants, and cannot be used in addition to employer-provided vouchers or employer-supported care.

Know more about government schemes.

Employer-supported childcare and childcare vouchers

Where an employee joined their employer’s childcare or childcare voucher scheme on or before 4 October 2018, they can continue to benefit from the associated tax relief while their employer continues to operate the scheme. Childcare vouchers and/or employer-supported childcare are tax-free up to the employee’s exempt amount. Where the employee is a basic rate taxpayer or joined the scheme prior to 6 April 2011, the exempt amount is £55 per week.

Otherwise, the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer. The exemption also applies to National Insurance purposes. Employees only have one exempt amount for employer-supported care and vouchers and regardless of the number of children that they have.

It is also possible for employer-provided childcare and childcare vouchers to be made available under a salary sacrifice scheme without triggering the alternative valuation rules.

Workplace nurseries

No tax charge arises under the benefit in kind rules where childcare is provided in a workplace nursery. Unlike the exemption for employer-supported care and vouchers, there is no cap on the value of childcare that can be provided tax-free in a workplace nursery. However, there are stringent conditions that must be met for the exemption to be forthcoming.

Which is best?

Where a parent could potentially benefit from more than one scheme, they should evaluate the options can choose the one best suited to their needs. Employees in an employer-supported scheme or employer voucher scheme will need to leave that scheme if they sign up for the Government scheme, and will not be able to re-join the employer’s scheme if they change their minds.

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