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What is ‘Tax-Free Childcare’ ?

Posted on 19 August 2015

From 2017, the existing Childcare Vouchers (CCV) scheme will be closed to new joiners. Anyone who is already getting the vouchers can remain on the scheme indefinitely, until they change job, no longer have qualifying children, stop getting vouchers for more than a year or start getting the new Government Tax-Free Childcare (TFC) scheme.

Some people will not be eligible for the new scheme, some will lose out and some people will benefit.

The best advice for any parents is to start getting CCVs now – even for a minimal value, to protect their entitlement. This way you will have a choice in 2017 of which scheme is more beneficial. Even if you calculate that you are better off with TFC now, your circumstances could change and unless you start getting CCVs now in advance of the introduction of TFC, you will not have the choice when the time comes.

What is ‘Tax-Free Childcare’ (TFC) and what are the savings?

‘Tax-Free Childcare’ (TFC) is a new scheme that is being introduced by the Government. The intention is that it will be introduced 2017.  In fact it’s unrelated to the tax system although effectively the parent saves 20% of their childcare costs.  This is how it works:

A parent can put money into an online account and the government will top it up by 20p of every 80p the parent puts in, up to £10,000 a year per child.  So if a parent has childcare costs of more than £10,000 a year for one child, they would put in £8,000 and the Government will put in £2,000. 

To give an idea of how this compares with CCVs, with TFC, a family saves 20% of up to £10,000 per child.  With CCVs a basic rate taxpayer saves 32% of up to £2,916 (and double for two parents). A higher rate taxpayer pre 2011 saves £42% of up to £2916.  A higher rate taxpayer post 2011 saves 42% of up to £1,484.

An important point is that TFC is per child, whereas CCVs are per parent. So a family with two working parents can double their savings by both getting CCVs, and a family with two or more children can make greater savings with TFC.

As a rule, for a family with one child and two working parents, they would need childcare costs of greater than £9,660 to benefit more with TFC than CCVs.

Another thing to consider is that not all families are eligible for TFC.  For example if one parent is not working, then neither parent is eligible for TFC and a family in receipt of universal credit cannot also get TFC.

At the moment you do not need to do anything, as the new scheme will not be introduced until 2017.  It is advised to remain in the existing CCV scheme, even for a minimal value to ensure that you have the choice of scheme. Parents not already getting CCVs, will not be able to start after the TFC scheme has been introduced.

Download our Parents Guide to Tax-Free Childcare for more information.


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