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What Tax-Free Childcare could mean for you

Tags: childcare, childcare vouchers, tax-free childcare, single parent, co parenting
Categories: After Separation

In the first budget of the new government, Chancellor George Osborne has announced some changes to the way childcare support will be handled.

If you are a separated parent and are currently claiming employer-supported childcare vouchers, the new scheme could mean a change to the way you pay for your childcare, and the financial contribution that you are entitled to.

Understanding Tax-Free Childcare

The new scheme is known as Tax-Free Childcare and will be managed directly by the government, rather than through your employer.

From 2017, you’ll be able to open an online account to pay in the cost of your childcare. For every 80p you pay into the account, the government will make a contribution of 20p. As most people pay around 20% in tax, this is seen as a sort of ‘tax refund’, which explains the name Tax-Free Childcare.

Anyone can pay into your account, so if you currently get help from another family member, or if your ex-partner makes a contribution towards childcare costs, they will be able to continue this arrangement through the new scheme.

If you qualify for Tax-Free Childcare, the scheme will support your childcare costs for up to £10,000 per child per year. This means that if you pay in £8,000 across the year, you’ll be eligible for a £2,000 government contribution. The scheme applies to children up to 12 years old. Parents of disabled children will be able to claim £4,000 per year and can use the scheme until the child is 17 years old.

The scheme is only available to working parents, so you’ll need to be earning a little over £50 a week to qualify. As the new scheme allows you to claim your contribution directly from the government, it will no longer depend on your employer offering vouchers. You can even claim if you are self-employed and, if you’re just starting out, you’ll get a grace period at the beginning as you build up your earnings.

You’ll be allowed some flexibility in the amounts you pay in, so if you find it easier to pay in different amounts each month, you can. You can also withdraw anything you’ve paid in if your circumstances change and you want to leave the scheme. If you do this, remember that the government will also withdraw their contributions, so it’s worth keeping track of what’s yours and what’s not.

Deciding if Tax-Free Childcare is right for you

The new scheme is not compulsory, and you can continue to use Employer-Supported Childcare if it suits you better. With employer-supported childcare vouchers, your contribution is taken out of your salary before tax and other deductions so, depending on the amount you pay for childcare and your tax rate, you may be better off sticking with what you’re doing now.

For example, if you’re a single parent on a basic tax rate, you would need to be spending a minimum of around £389 per month on childcare to reap the benefits of switching to the 20% rate available through the new scheme.

However, tax rates and other circumstances do vary and what works for one person will not necessarily work for you. It’s important to do your own research based on your earnings and costs to make sure you’re choosing the best deal. If you’re unsure, contact your current childcare provider and ask them to go through the process with you, so you can see exactly how much you’re currently spending and whether you would save anything by changing over.

You should also be aware that Tax-Free Childcare is not available to anyone who has a stay-at-home partner, and you may lose your eligibility if your circumstances change. If you go from living alone to living with a partner who does not work, you will no longer be able to claim Tax-Free Childcare.

The scheme applies to the children rather than the parents, and is only available for one household. This means that even if you and your child’s other parent live apart and your children spend time living in both households, only one of you will be able to claim. You may need to discuss this with your ex-partner and come to an agreement that suits your child before making a decision.

If you’ve previously been using employer-supported childcare vouchers, you may find that the new system is a little more complicated. You will be required to reconfirm your eligibility once every three months, so you’ll have to stay on top of this, particularly if you have a regular payment set up to your childcare provider.

As with any financial decision, make sure you understand the changes and how they might affect you before you commit to a decision.

The online accounts will be available through the website from 2017.

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