New scheme for tax free childcare

The Government has announced a new scheme for tax free childcare for working families. Once fully up and running, the tax free childcare scheme will be worth up to £1,200 per child, and so will save a typical family with two children under 12 years old up to £2,400 a year.

The scheme will be phased in from autumn 2015 and will ultimately be open to around 2.5 million families with children under 12. For the first year of operation, all children under 5 will be eligible initially opening the scheme to 1.3 million families.

To be eligible, families will have to have all parents in work, with each earning less than £150,000 a year and not already receiving support through Tax Credits or Universal Credit. They will receive 20% of their yearly childcare costs up to £6,000 per child.

The new scheme will extend support compared to the current system of Employer Supported Childcare (ESC). ESC is offered by less than 5% of employers and is used by around 450,000 families. It provides an income tax and National Insurance Contributions (NICs) exemption equivalent to basic rate tax relief for childcare vouchers and directly contracted childcare. These alternatives will be closed to new entrants as the new scheme is introduced. Existing members of these schemes can however choose to remain in their current scheme. Alternatively ESC recipients may choose to move into the new scheme if they wish but will not be able to receive both. Further, the tax exemption available for workplace nurseries will continue, where offered by employers.

For parents who currently receive childcare support through Tax Credits and in due course Universal Credit, the Government will increase childcare support to improve work incentives and ensure that it is worthwhile to work up to full time hours for low and middle income parents. At present, through the childcare element of Working Tax Credit, households where each parent works 16 hours or more already receive support for 70% of their childcare costs up to a weekly cap of £175 for one child or £300 for two or more.

The Government will shortly consult on the detail of the new scheme, including details on how employers can continue to play a role in supporting their employees with childcare costs within the new system. We will keep you posted of key developments in the run up to when the new scheme is implemented.