Sarah Bradford crunches the numbers and reveals whether claimants should ditch childcare vouchers or take up the new tax childcare top up scheme.
The government’s new childcare top-up scheme was launched on 28 April 2017 and is being rolled out progressively.
Under the scheme, working parents with a child under the age of 12 (or a disabled child under the age of 17) can open an online account into which they can deposit money to pay for their childcare. For every £8 deposited into the account, the government will add another £2 to a maximum of £2000 per year (or £4,000 where the child is disabled).
The new top-up scheme will eventually replace the existing tax and national insurance exemption for employer-supported childcare and childcare vouchers. However, employees will still be able to join employer-supported childcare and childcare vouchers schemes until April 2018, and remain in the scheme for as long as the employer continues to make them available.
It is not possible to benefit from both the tax exemption and the new top up scheme. So which is best?
Doing the sums
Childcare support and childcare vouchers are usually made available to employees through salary sacrifice and flexible remuneration schemes. Their provision is unaffected by the crackdown on salary sacrifice schemes from April 2017 and the associated tax exemptions remain available.
Where an employee joined the scheme on or after 6 April 2011, the tax exemption is worth £11 per week (£572 per year) regardless of the employee’s marginal rate of tax. There are also NIC-savings, equivalent to a further £6.60 per week for basic rate taxpayers (and 56p per week for higher rate taxpayers).
Whether it is worth switching to the new scheme depends on a number of factors and there is no substitute for crunching the numbers.
An employee is a basic rate taxpayer with one child and receives childcare vouchers of £55 per week under a salary sacrifice scheme. Her partner does not receive childcare support from his employer.
The tax and NI savings are worth £17.60 per week (32% of £55), equivalent to £915 per year. If the employee’s total childcare costs exceed £4575, it will be worth switching to the top-up scheme. To fund child care costs of £4,575 the employee will need to deposit £3,660 in the online account and will receive a government top up of £915 – equal to the tax and NIC savings as a result of the exemption.
If the employee were a higher rate taxpayer, the tax and NIC savings are worth £11.76 per week (42% of £28), equivalent to £611.52 and the switch over point is reached once childcare costs exceed £3,057.60.
Additional rate taxpayers can benefit from the exemption but not the top-up scheme.
Under the new scheme, the top-ups apply per child, so those with more than one child in childcare may be better off under the new scheme.
Do you qualify?
Not everyone is eligible for the top up scheme. To qualify, the individual and, where applicable, his or her partner, must meet eligibility conditions, which include being in qualifying paid work (either as an employee or self-employed), earning at least £120 hours per week (equivalent to 16 hours per week at the level of the National Living Wage), being over the age of 16 and being responsible for the qualifying child.
The top-up scheme is not open where either the individual or his or her partner earns more than £100,000.
Tax credit and universal credit claimants cannot benefit from the top-up scheme (or the tax exemption) – consequently there is a choice to be made here too.
Offering childcare support and childcare vouchers has associated time and administration costs for the employer, but where provision is via a salary sacrifice scheme, there are NIC savings to be had of 13.8%. All these factors will need to be taken into account in deciding when to bring the tax-exempt scheme to an end.
Childcare Payment Act 2014 and associated regulations.
About Sarah Bradford
Sarah Bradford BA (Hons) ACA CTA (Fellow) is the director of Writetax Ltd (www.writetax.co.uk) and its sister company, Writetax Consultancy Services Ltd. She writes widely on tax and National Insurance contributions and is the author of National Insurance Contributions 2015/16 published by Bloomsbury Professional. She can be contacted at [email protected]