Is the new tax-free childcare scheme any good?
Philip Hammond confirmed in his Budget speech that the government's new tax-free childcare scheme is set to be launched in April. So will the change leave you better off - or should you stick with your vouchers?
See also: Budget 2017: What it means for you
See also: Parents spending 'twice as much' on part-time childcare as on food and drink
See also: Grandparents 'saving working families billions in childcare costs'
The new scheme is essentially a savings platform for childcare. You put money into the scheme, the government tops it up by 20% (so if you pay in £80, then after tax relief you'll have £100). You then need to spend this on childcare. You're limited to putting £8,000 a year into the scheme - so top ups are capped at £2,000.
Jonathan Watts-Lay, Director of WEALTH at work, a leading provider of financial education in the workplace, explains that it's not replacing childcare voucher entirely just yet. He says: "Parents who are already members of the current Child Care Voucher system can continue in it, providing their employer will still provide access to it; new members will also have the opportunity to join the current scheme up until April 2018."
Philip Hammond's speech seemed to indicate that it would be a major boost for every working parent - offering up to £2,000 towards childcare, but it's not that simple. Lemonade Money has crunched the numbers, and revealed that for some parents, the scheme is far less generous than the current childcare voucher scheme.
Basic rate taxpayer couple
Working parents Rita and Fred currently pay £400 per month for childcare, each buying £200 worth of monthly childcare vouchers to pay for this, so £4,800 per year. They collectively save £1,536 in tax and National Insurance contributions meaning their vouchers cost £3,264.
If they put £3,264 into the Government's new savings account (available through the Gov UK website and run by National Savings & Investments), Rita and Fred's 20% top-up gives them £4,080 - £720 less than what the vouchers are worth.
Watts-Lay calculates that a family with two children - who pay basic rate tax - will have to spend more than £4,665.60 a year on childcare for each child to be better off under the new scheme.
Higher rate taxpayer couple
Higher rate tax payers Ushmi and Ross currently buy £2,912 worth of childcare vouchers (£1,456 each). The salary sacrifice scheme gives them a collective tax and National Insurance saving of £1,223.04 (£611.52 each), meaning the vouchers effectively cost them £1,688.96.
If they put £1,688.96 into the new childcare account and it was topped up by 20%, they would have £2,111 to pay towards childcare – a loss of £800.
Watts-Lay explains: "The balance of NI and tax saving versus the 20% new top up only comes in favour of the new scheme [for higher rate taxpayers] once parents are spending more than £6249.60 a year on childcare per child."
Basic/higher rate taxpayer couple
Working parents, Phil and Michelle are paying basic and higher rate, together they can currently buy £4,316 worth of childcare vouchers (£2,860 basic and £1,456 higher). The salary sacrifice scheme delivers them a collective tax and National Insurance saving of £1,526.72 (£915.20 basic and £611.52 higher), meaning their vouchers effectively cost them £2,789.28.
If they put £2,789.28 into the new childcare account and it was topped up by 20%, they would have £3,486.60 to pay towards childcare – a loss of £829. For the 20% top-up to match their tax and National Insurance savings, they'd need to pay in £7,634. Over this, they're better off (but remember the Government only pays 20% on savings up to £8,000).
Older children
Watts-Lay also highlights another group that is set to miss out under the new scheme. He explains: "Tax Free Childcare will only be available to parents with children up to the age of 12 (17 if disabled), whereas the current Childcare Voucher system is available to children up to the age of 15 (16 if disabled); so those with older children could lose out. There will also be no National Insurance (NI) saving under the Tax Free Childcare system; therefore employed parents with lower childcare costs could be worse off.
Better off
Others, meanwhile are better off - notably those who don't currently have access to a voucher scheme. Again Lemonade Money crunched the numbers.
Self-employed/basic rate taxpayer couple
Working parents Michael and Paula currently pay £500 per month for childcare. Michael is self-employed so not eligible for any schemes and Paula buys £243 (maximum allowed) worth of monthly childcare vouchers to pay towards the cost, so £2,916 per year. Paula saves £933 in tax and National Insurance contributions meaning her vouchers cost £1,983.
Michael and Paula would only need to put £400 per month into the Government's new savings account, as the 20% top-up on their £4,800 pot would give them an extra £1,200 (enough to cover their yearly childcare). This is more than the £933 Paula saves in tax and National Insurance.
Self-employed/higher rate taxpayer couple
Self-employed and higher rate taxpayers Ben and Natalie currently pay £500 per month for childcare. Ben is self-employed so not eligible for any schemes and Natalie buys £121.33 (maximum allowed) worth of monthly childcare vouchers to pay towards the cost, so £1,456 per year. Natalie saves £612 in tax and National Insurance contributions meaning her vouchers cost £844.
Similarly, Ben and Natalie only need to put £400 per month into the Government's new savings account as the top-up on their £4,800 pot gives them an extra £1,200. This is far more than the £844 Natalie saves in tax and National Insurance using the monthly childcare vouchers.
For anyone in a more complicated situation, it's worth checking this comparisons table.
