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Childcare Costs – A Note on Tax Credits, Childcare Vouchers and the new Tax Free Scheme

There is a new childcare tax break on the horizon: Tax-Free Childcare was announced by the Coalition government and was anticipated for introduction in autumn 2015. However, following a legal challenge the scheme was put on hold until the court ruled it is lawful to proceed. In its latest form Tax Free Childcare is now planned to be launched in ‘early 2017’.

The scheme provides that each family can open an online account and for every 80p paid in to your account the government will add a top up of 20p, up to a cap. It will be available for child care costs of children up to the age of 12, for parents earning between £100 a week (on average) and not more than £100,000 a year.

It will only be available to those who are not claiming tax credits or universal credit, in due course.

Employer Supported Childcare or childcare vouchers will remain open until the new Tax Free Childcare scheme comes in. Under this scheme if your employer offers childcare vouchers, you pay for childcare from pre-tax income which can be worth up to £930 a year per parent. However, the government says that as Employer Supported Childcare is not available to self employed parents, the new scheme will benefit many more families.

As currently set out, you will not need to switch to Tax Free Childcare if you use the Employer Supported Childcare and remain with the same employer. Workplace nurseries will be unaffected by the introduction of Tax-Free Childcare.

In the meantime, you may be able to get childcare tax credits straight away. If you pay for childcare and work 16 hours a week or more, or are a couple both working 16 hours a week or more, you could be eligible for childcare tax credits to contribute up to 70% of your childcare costs. They can be worth £1,000s a year. Though as above, if you get these, you will not be able to also get the new Tax Free Childcare account.