Childcare vouchers, which are currently provided via the employer supported childcare (ESC) scheme, have been around for over 20 years. Their purpose is to help parents fund their childcare needs in a tax-efficient way. For some time the government has been looking at altering the ESC scheme and in May 2015 (exactly six months ago to the day) we reported on the new tax-free childcare scheme it had settled on.
Tax-free childcare had been set to go live in autumn 2015 – at which point the ESC scheme would remain in place but be closed to new applicants. Two providers of the ESC scheme issued a legal challenge to the government’s new tax-free childcare scheme. They claimed to have serious concerns about how it would be delivered and the effect it would have on parents trying to access childcare support.
The dispute ended up in the Supreme Court. Having listened to all the arguments the Court confirmed that the new tax-free childcare scheme is perfectly lawful. So why hasn’t the scheme materialised yet? After all, if it’s legal why can’t the government just roll it out? The delay has been caused by the Court which placed a suspension on the new scheme during the case, i.e. all work on it had to stop. Consequently, it won’t now come into force until early 2017.
Under the new scheme eligible families will be able to have 20% of their annual childcare costs paid by the government. For every 80p an employee pays in (via a Childcare Account), the government will contribute 20p up to a maximum of £2,000 per annum. The tax-free scheme assumes a maximum of £10,000 per annum in childcare costs but, unlike the ESC, it’s available per child.
Note. Crucially, both parents must be working in order to qualify for the new scheme and they are responsible for the admin side – the burden doesn’t fall to you.
However, whilst the new scheme is labelled tax free, research shows that 66% of parents will actually be better off under the ESC voucher scheme. This is partly because it’s available for children up to the age of 15 whereas parents will only be able to use the tax-free childcare scheme for children up to twelve.
Tip. It’s worth mentioning to employees that the existing ESC voucher scheme will now remain open to new applicants until early 2017. If the new tax-free scheme will be better for them, they can always transfer to it at a later date. What they won’t be able to do is join the ESC scheme once the tax-free scheme goes live, so if they are ineligible for it they will miss out.
For the previous article on the tax-free childcare scheme, visit Childcare Vouchers .
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