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Changes in 3-4 year old funding may impact other childcare finance options

Posted on 11 August 2015

Childcare funding has been top of the political agenda again, with the new Conservative Government announcing their intention to extend the 15 free hours for 3-4 year olds to 30 hours.  This was confirmed in the recent summer budget to be starting from September 2017.

So what does this mean in practice and how does it impact other childcare funding decisions?

Firstly it’s a shift in perception of the 3-4 year old places. The original intention was based on the assertion that children who attend high quality early years education have better outcomes. This policy makes such early years education more accessible; however the plan to extend it to 30 hours only applies to families where both parents work or single parent families where the parent works.  This shifts the perception of the policy from being about accessing early year’s education, to offering financial support for the cost of childcare to enable parents to work. This means that it should be considered in relation to other available support.

The big change in childcare funding comes in the shape of ‘Tax-Free Childcare.’

 ‘Tax-Free Childcare’ (TFC) is a new scheme that is being introduced by the Government in early 2017. In reality, it’s unrelated to the tax system although effectively the parent saves 20% on their childcare costs.  A parent can open an online account and for every 80p they deposit, the government will put in 20p and up to £2,000 per child.

When TFC is introduced, the existing Childcare Vouchers (CCV) scheme will be closed to new joiners

Anyone who is already receiving the vouchers can remain on the scheme indefinitely.  The existing scheme enables each working parent to save tax and NI on their registered childcare up to £55 a week.  The scheme is normally offered by way of a salary sacrifice arrangement, generating savings of £933 per parent.

There are key differences in the scheme and not everyone is eligible for TFC (both parents have to be in paid work for example) However at its simplest, TFC can save each family 20% of their childcare costs up to £2,000 per child. CCVs can save each parent 32% of their childcare costs up to £933 per parent.

This means that on the whole, the greater the childcare cost, the more likely a family is to benefit from TFC rather than CCVs.  A family with two working parents paying basic rate of tax would benefit more from TFC only if they have childcare costs of more than £9,330 a year. This is where the 3-4 year old funding comes in.   

How changes in childcare funding for 3-4 year olds may leave parents also using TFC worse off in 2017 - an example:

Take a family with two parents working full time paying £5 an hour, with total annual costs of £13,000. They could save £2,000 with TFC and £1,866 by both parents receiving CCVs.

When their child turns 3, their childcare costs reduce by £2,850 as they now have a total of 570 hours a year funded (the 15 hours are term time only so for 38 weeks of the year).  They would still be better off with TFC as their total childcare costs are £10,150 – so they can save £2,000.

However when this is increased to 30 hours a week for 38 weeks, their cost goes down by £5,700 to £7,300. At this point the TFC savings become £1,460 a year – so they would be better off with CCVs by £406 a year (saving £933 per parent, so £1,866 in total).

This example based on a change in childcare funding highlights why parents should get CCVs now regardless of their circumstances. Even if they think TFC may benefit them more, their circumstances or even legislation could change when it’s too late – meaning they could lose out. 

 

For more information on winners and losers of the TFC scheme and also a comparison table between TFC and childcare vouchers please click below.

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

August 2015

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