Tax-Free Childcare is a confusing and inaccurately named scheme that launched in April 2017. It can be worth thousands of pounds, but only 250,000 of the 1.5 million eligible families are collecting it.
The fact that so many have been put off isn’t surprising, as the scheme has been beset with problems, poor communication and tech glitches. Yet I believe it’s time to look afresh.
For those paying for childcare, it can be worth £2,000 annually per child, towards Education Scotland registered nurseries, childminders, nannies, after-school clubs, play schemes and home care.
Yet it’s not for everyone, so let me go through this with a brief step-by-step guide – for full details and calculators see my full Tax Free Childcare help guide at www.mse.me/taxfreechildcare.
First, check if you even need to pay for childcare. Every parent in the UK can get funded childcare for all three to four-year-olds – so you don’t pay. How much you get depends on where you live.
In Scotland kids aged three and four are entitled to 600 hours of childcare (16 hours a week). The Scottish Government plans to increase this by 2020 and some have already had extra hours phased in.
How smoothly this all works is open to question – many childcare providers argue they are underfunded to do the job.
Pay for childcare and have income under £40,000?
If you’re working (in a couple both must work) and pay for childcare, then the new Universal Credit social security system could cover up to 85 per cent of your childcare costs up to a maximum of £7,750 for one child, or £13,300 for more children.
Who’s entitled to this benefit is complex. I tried to come up with a rule of thumb – as I did for its predecessor tax credits – but it is impossible. So instead if you pay for childcare, work (both work in a couple) and earn under £40,000 I’d definitely spend ten minutes on the www.mse.me/benefitscalc. I’m not saying you will get Universal Credit, just that it is worth checking.
How much you can get –if you’re entitled to it at all – depends on your individual circumstances. If you have expensive childcare costs, you may be due it even at higher income levels. If you get Universal Credit, you won’t be able to get Tax-Free Childcare (but you’ll likely get more on Universal Credit anyway).
Now we get onto what this is all about. To get Tax-Free Childcare you open up an online, state-run, www.childcarechoices.gov.uk account and for every 80p you put into it, the state adds 20p. You can put in up to £8,000 per child per year, so up to £2,000 (£4,000 if your child is disabled) will be added for use towards Ofsted (or equivalent) registered childcare.
The gain from this boost is equivalent to the income tax paid by a basic-rate taxpayer – hence the name. Though higher-rate taxpayers don’t get a bigger boost – so the name is confusing, rather than helpful. To be eligible for it you must be paying for Education Scotland childcare for an under-12 (under-17 if he or she is disabled) and be working and earning £131+/week – for couples, both must earn this. No one parent can earn £100,000+/yr. The self-employed can also get this, as well as those who are employed.
If you already get childcare vouchers you may be best to stick with them. Tax-Free Childcare was designed to replace the old Childcare Vouchers scheme that closed to new sign-ups last October. Though if you were already getting them, you can keep them going, so may still be using them now.
Often they are worth keeping, especially for couples where only one parent works, as that disqualifies you from Tax-Free Childcare, but not from vouchers.
If you’re eligible for both schemes, parents with more children and higher childcare costs, are better off with Tax-Free Childcare as there’s far more free cash available. Yet for those with lower childcare costs and fewer kids, vouchers can be better – while less is available, they’re effectively a bigger discount for each pound spent. See www.mse.me/comparechildcare for an infographic comparing the two
While you can use Childcare Vouchers if you get Universal Credit, it tends to reduce the amount of you can get for childcare, so it’s often not worth using vouchers if you’re eligible for Universal Credit.
Martin Lewis is the founder and chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.