New Tax Free Childcare System Explained

The extension of tax free childcare provision has been in the news a lot recently, but for many parents understanding the requirements to qualify can be confusing. So with that in mind lets take a look at this important sector and begin to simplify the process.

So what is it?

The tax far childcare scheme is ostensibly a money back scheme whereby working parents can get a 20% rebate of the cost of their childcare up to a maximum of £1,200 per child. The scheme will be put into operation in Autumn 2015.

Who qualifies?

Their is one key requirement here – both parents MUST be working or, in the case of single parent families, the single parent MUST be working. We could go into the fairness of the scheme, but that subject requires a blog post of its own…

Initially the scheme will be available to children under the age of five, but the Government has already indicated that it will be extended to those children under twelve.

The scheme will also be available to those on maternity/paternity leave as long as they are eligible before taking the leave.

What Are The Financial Restrictions?

Incredibly, both parents can earn up to £150,00 EACH, so a household that has a joint annual income of £299,999.99 are eligible.

What’s The Difference From The Current Childcare Vouchers System?

Under the current Childcare Voucher System parents can opt to exchange £243 of their gross monthly salary for vouchers (covering all forms of childcare up to the age of sixteen) this amount is exempt from tax and National Insurance contributions. This translates to a saving of up to £933 for those in the basic rate tax bracket, £623 for those in the higher bracket and £606 for those earning over £150,000.

The maximum any family can save is £1,866 per child, if both parents’ employers offer their own voucher scheme and they are both basic rate tax payers.

Under the new scheme, parents will be able to claim a maximum of £1,200 per child annually towards their childcare costs. This means that a basic rate tax payer with one child stands to lose out on £660 a year, whereas those basic tax rate taxpayers with more than one child and those in higher tax brackets stand to gain financially as the new scheme will not be means tested as the current voucher system is.

It is important to point out that the basic tax rate payers losses will apply to those who join the scheme AFTER 2015. Anyone currently receiving childcare vouchers will be forced to join the new scheme if it means they will lose out.

So there you have it,  you can agree or disagree with its effectiveness and fairness, but first get to understand it and make sure your up to speed with the changes so that you do not lose out.

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