Are you a working parent? You might be missing out on £2,000 per child per year towards the cost of childcare.

Tax-free childcare update

HMRC have recently run a campaign to remind people that they could be missing out on up to £2,000 per child, per year, towards the cost of childcare.

Working parents and guardians may be eligible to receive government top-ups of £2 for every £8 that they pay into a tax-free childcare account, up to a maximum of £2,000 per child (or £4,000 for disabled children), although there is an overall maximum limit of £10,000.

The scheme is open to all working parents across the UK with children under 12, or under 17 if disabled.

Under the scheme, the parent/guardian opens an online account via the government’s Childcare Choices website and decides how much to pay in and how often. The flexible nature of the accounts mean that account holders can pay in more in some months, and less at other times, depending on how much they have spare to invest. The account holder’s circumstances are re-confirmed online every three months. Money can be withdrawn at any time but the government contribution will be lost.

Again, the flexible nature of tax-free childcare allows anyone to pay into the account, including grandparents, other family members or employers.

To qualify for the government contribution, account holders will usually have to be in work, expecting to earn at least the National Minimum Wage (NMW) or National Living Wage (NLW) for 16 hours a week on average, over the next 3 months. This currently equates to at least £1,707.68, which is equivalent to the NLW for people over 25.

Where an individual is not working, they may still be eligible for tax-free childcare if their partner is working, and they receive Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or Employment and Support Allowance. It is also possible to apply where the claimant is starting or re-starting work within the next 31 days.

Self-employed people who do not expect to make enough profit in the next three months can use an average of how much they expect to make over the current tax year. Additionally, the earnings limit does not apply to self-employed individuals who started their business less than twelve months ago.

Where the individual, or their partner, has an ‘adjusted net income’ over £100,000 in the current tax year they will not be eligible for tax-free childcare.

Broadly, ‘adjusted net income’ is total taxable income before any personal allowances and minus certain payments, such as those made under Gift Aid. It is also worth noting that the £100,000 limit includes any expected bonuses.

It is not possible to receive tax-free childcare at the same time as claiming Working Tax Credit , Child Tax Credit , Universal Credit (UC) or childcare vouchers. Which scheme the individual is better off with depends on their situation. The Childcare Choices website includes a childcare calculator for parents to compare all the government’s childcare schemes on offer and check which works best for their families, including the 30-hour free childcare offer, tax-free childcare or universal credit.

Employer-provided childcare

Tax-free childcare effectively replaces HMRC’s employer-supported childcare scheme. However, parents who joined an employer-childcare voucher scheme before 4 October 2018 have the option of remaining in that scheme for as long as the employer offers it, or for as long as they stay with the employer. The employer-provided voucher scheme closed to new entrants from 4 October 2018.

Where an individual decides to switch from childcare vouchers or directly contracted childcare, they must tell their employer within 90 days of applying for tax-free childcare.

Finally, with regards to UC, HMRC recommend that the claimant waits until a decision on a tax-free childcare application is received before cancelling a UC claim.

Anyone who pays for childcare would be wise to check their eligibility for tax-free childcare as they could be missing out on considerable financial support.

Partner note: HMRC guidance https://www.gov.uk/tax-free-childcare; Childcare Choices website https://www.childcarechoices.gov.uk/

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Here’s how to apply for tax-free childcare:

Government childcare scheme – tax-free top-up

Working parents can receive a tax-free top up from the Government to help with their childcare costs. The top up is worth £500 every three months (£2,000 a year). A higher top-up of £4,000 a year (£1,000 every three months) is available where the child is disabled.

To receive the top-up, eligible parents must open an account online. The Government will provide a top-up of £2 for every £8 deposited by the parents, up to the above limits. The money in the account is then used to pay for childcare with a registered provider.

Who is eligible?

To qualify for tax-free childcare, the claimant (and their partner if they have one) should be in work, on sick leave or annual leave or on parental, maternity, paternity or adoption leave. The scheme is open to both the employed and the self-employed. However, earnings conditions apply.

The claimant (and their partner if they have one) must earn a minimum of £131.36 per week on average (which is equivalent to 16 hours at the National Living Wage of £8.21 per hour for 2019/20 for people age 25 and over). This equates to £1,707.68 over three months. This limit does not apply to a self-employed person who started their business within the previous three months.

There is also an earnings cap – tax-free childcare is not available where the claimant or their partner has ‘adjusted net income’ of more than £100,000. This is broadly taxable income before personal allowances, less items such as gift aid.

The child

Tax-free childcare is available for a child who is 11 or under and who lives with the claimant. Eligibility ceases on 1 September following their 11th birthday. A disabled child remains eligible until they are 17.

Using tax-free childcare

Tax-free childcare can be used to pay for childcare that is approved childcare. This includes childminders, nurseries, nannies, after school clubs, playschemes and home care agencies. The childcare provider must sign up to the scheme.

Interaction with tax-credit and Universal Credit

Tax-free childcare is not available at the same time as working tax credit, child tax credit or universal credit. The childcare calculator is available on the Gov.uk website at www.gov.uk/tax-free-childcare.

Employer-supported childcare and childcare vouchers

Similarly, an employee cannot benefit from both the tax-free top-up under the Government scheme and the tax exemption for employer-provided childcare vouchers or employer-supported care. Again, what is the best option will depend on personal circumstances. An employee within an employer scheme must tell their employer they have applied for tax-free childcare within 90 days of making the application.

How to apply

Applications for tax-free childcare can be made online at www.gov.uk/apply-for-tax-free-childcare.

Partner note: See www.gov.uk/tax-free-childcare.

To find out more please follow us on Facebook , Twitter or LinkedIn. Feel free to contact us on 0333 006 4847 or request a call back by texting to 075 6464 7474