Thankfully figuring that out isn’t too difficult. First, see if you’re due free childcare; if not, go for free cash towards it, if not, grab a scheme that effectively discounts the cost. So I’m going to take you through it in that order, rather than just focus on the changes.
When I’m talking about childcare, it’s worth noting the definition for this purpose is specifically Ofsted (or equivalent in the rest of the UK) registered nurseries, nannies, childminders, after-school clubs, or summer school (even if that’s all they go to).
For full information on all the options, see www.mse.me/childcarecosts. Here’s a quick rundown of the main points…
Are you eligible for what will be up to 30 hours a week of free childcare?
Currently, in England for at least 38 weeks a year everyone with a three or four-year-old (or two-year-old if you’ve low income), is entitled to 15 hours a week of free state or private nursery childcare. From September 2017, this will increase to 30 hours a week, but only if you earn at least £115 a week (if a couple both parents must) but neither parent earns over £100,000 a year.
Similar schemes, but with variations on hours, are available across the UK. For info see www.scottishfamilies, http://gov.wales/topics/people-and-communities/people/children-and-young-people/parenting-support-guidance/childcare/help-paying-for-childcare/?lang=en, www.nidirect.gov.uk/information-and-services/childcare/childcare-benefits-tax-credits-and-other-help-working-parents.
Paying for childcare? Are you eligible for childcare tax credits (free cash).
I’ve a rule of thumb for you. If you pay for childcare for a child up to age 15 and are a single parent working 16+ hours a week, or a couple both working 16-plus hours a week, with total household income under £40,000, you should definitely check if you’re entitled to childcare tax credits.
Now let me be very clear, this doesn’t mean you will be eligible – it’s far too complex to say that – just that it’s worth calling the tax credit hotline on 0345 300 3900 to check. Tax credits are just a cash payment into your bank account, and they can be big, with typical payouts around £3,000 a year.
If you are going to call, it’s worth noting that technically the real name of childcare tax credit is the ‘childcare element of working tax credit’ (totally different to child tax credits).
If you’re entitled to childcare tax credits, then go for it, as it’s free cash, unlike the two schemes below which are discounts. If you get tax credits you’re not then allowed to get Tax Free Childcare and while you can get childcare vouchers, doing that may reduce your tax credits, so isn’t worth it.
Discounted childcare via vouchers – but sign up soon.
The Childcare Vouchers scheme is run via employers, and you can only do it if your employer offers it – thankfully many do.
What usually happens is your employer will let you trade in salary for vouchers. For example, a basic-rate taxpayer can swap £1,000 of salary, which after tax and national insurance is only £700ish in your pay packet, for £1,000 in childcare vouchers. You can then use them to pay for childcare. So you’re up £300 per £1,000. Full help on this at www.mse.me/childvouchers.
Any parent can do this, but vouchers are gradually being phased out due to the launch of the Tax Free Childcare. If you’re not part of a scheme by April 2018, you won’t be able to sign up after, so if it’s your winner (see point 5) don’t miss that. Even if you don’t need the vouchers, just get a very small amount to start, then you can increase it later. Check.
Discounted childcare via the new Tax-Free Childcare scheme
The new Tax-Free Childcare scheme is being rolled out to parents of the youngest children this month and should be available to all parents by the end of 2017. As it’s nothing to do with your employer, it’s likely many of those who couldn’t get vouchers, including the self-employed, will welcome it.
For every 80p you put in a special account to pay for childcare at the government-backed NS&I, the government will add 20p up to a total of £8,000 per child. So that’s £2,000 added.
Yet it’s only available if you earn over £115 a week (both of you must, if a couple) and neither earns over £100,000. Full info on the new scheme at www.mse.me/taxfreechildcare.
Vouchers v Tax-Free Childcare! You can’t have both, so which wins?
This isn’t easy, I’ve done a full summary www.mse.me/taxfreechildcare#compare, but in a nutshell…
l Are you eligible for both schemes? With childcare vouchers your employer has to offer it; but if it does, you can get it, regardless of how much you earn or whether your partner works or not (if a couple and both parents employers offer it, you can both get it).
Yet, anyone can get Tax-Free Childcare, but there’s an income limit. You (both if a couple) have to meet the £115 income threshold and can’t earn over £100,000.
l Which is best if you’re eligible for both? This is where it gets really complex. There are two elements.
1) The maximum gain from Tax Free childcare is much bigger, up to £2,000 per child (eg, £6,000 for three kids), while vouchers is just £930 per parent for a basic-rate taxpayer (£624 for higher-rate, £590 for top-rate).
2) Yet the discount from Tax Free Childcare is just 20 per cent off, while it’s bigger with vouchers at 32 per cent for basic rate taxpayers (42 per cent higher-rate, 47 per cent top-rate).
So those with bigger costs and more kids will tend to be better with Tax Free Childcare, while those with smaller costs and less kids, are better off with vouchers.
Martin Lewis is the founder and chair of MoneySavingExpert.com. To join the 12 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip