Martin Lewis: An urgent warning for parents paying for childcare…

Update Wed 14 Mar – childcare voucher deadline extended. Parliament has just voted to extend the deadline for joining the Childcare Vouchers scheme by around six months (no final end date is confirmed). It’s still worth following the logic of the original info below to decide which scheme is best for you though (but I haven’t updated it with details of the new deadline).

Two schemes give up to £100s or £1,000s of free cash to parents who pay for childcare. But one, Childcare Vouchers, is closing to new sign-ups imminently. Every parent who pays for childcare needs to urgently check if this would be best for them, and if so, sign up. So I wanted to bash out a quick blog to help take you through it…

Childcare costs in the UK are said to be up 7% again this year, leaving many working parents struggling to afford it. Help is available, but the landscape is changing rapidly. So I’ve three steps for you to follow…

When I’m talking about childcare below, I mean any Ofsted (or equivalent in other UK nations) regulated childcare such as nurseries, nannies, childminders and after-school clubs.

Step 1: Got a 3-4-year-old? You’re entitled to free childcare

Parents of 3 and 4-year-olds are entitled to free early education/childcare each week. Though how much depends on where in the UK you are…

  • In England: If you work over 16hrs/wk (and your partner does, if a couple) and you (both of you) earn less than £100,000, you’re entitled to 30hrs’ free childcare a week.

    Though the roll-out of this new scheme has been tricky – so it might not always be available. If you’re not eligible for the 30 hours’ free childcare, you’re still entitled to 15 hours a week. See free childcare England.
  • In Wales: All 3-4-year-olds get 10 hours of free childcare a week (some areas are being trialled at 30 hours). See free childcare Wales.

Childcare providers are only given a limited amount of cash by the state to pay for these free hours, far less than they normally charge (and many say less than cost price), if so, they often try to claw a little money back such as charging for lunches.

Step 2: If you’re paying for childcare – check first if you’re due childcare tax credits

Childcare tax credits, or more accurately the childcare element of working tax credits, is money the Government gives you towards your childcare costs, paid through the tax credit system. Don’t worry about the ‘tax credits’ bit, it’s just a benefit by another name.

My rule of thumb on this is…

If you work more than 16hrs/wk a week (if a couple you must both work more than 16hrs/wk), you pay for childcare and your total family income is less than £40,000, then…

… you should definitely check out whether you’re eligible for childcare tax credits (you can also call 0345 300 3900). Note: I’m not saying you’ll get it, just that it’s worth checking whether you will. The actual eligibility criteria are very complex.

Step 3: If you’re paying for childcare, there are two schemes which could be worth £1,000s

Now we get to the urgent bit. Both childcare vouchers and ‘tax-free childcare’ (that doesn’t actually mean it’s tax-free, it’s just a name) are available across the UK and designed to give help to those who pay for childcare. Yet you CAN’T have both (not even one type per parent).

  • Tax-Free Childcare: This launched in April 2017. You open up an online, state-run, Childcare Choices 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 can be added. It should be noted there have been many glitches and problems for people signing up to this.

    PS: If you get childcare tax credits (see above, not the same as child tax credit) you CAN’T get tax-free childcare as well.
  • Childcare Vouchers: Here you normally do what’s called a salary sacrifice. That’s where you agree to have your salary reduced, in exchange for your employer giving you the same amount back in childcare vouchers.

    But the key is that there’s no tax or national insurance on the vouchers. So let’s say you give up £1,000 of salary, after tax and NI, for a basic-rate taxpayer, that’s worth only £700ish in your pocket. In return, you get £1,000 of vouchers to pay for childcare, so you’re £300 better off.

    You can get this as well as childcare tax credits, but often it’s counterproductive as it impacts how much you can get.  See the Government’s vouchers vs tax credits calculator to decide.

The eligibility criteria for childcare vouchers and tax-free childcare are very different

Many will only qualify for one of the schemes – which is why working it out now, in case you’re only entitled to vouchers, is crucial.

Anyone can get childcare vouchers providing their employer offers them (they don’t have to). Yet that cuts out the self-employed.

Tax-free childcare is available to the self-employed, though you have to earn the equivalent of 16 hours a week at the national living wage (£120/week), and not over £100,000. And if you’re a couple, BOTH of you need to do this.

So if there’s one stay-at-home parent you can’t get this scheme (but if the employer of the working parent offers childcare vouchers you can get them).

The childcare voucher deadline is NOW…

If you’re not a member of the childcare vouchers scheme by Thursday 5 April, you won’t be allowed to join afterwards. And to be a member you need to have actually made the salary sacrifice and received vouchers.

With some payrolls, that can take up to a month to do, so if this sounds right for you – get your skates on – talk to your payroll department right away (in a few places it may already be too late).

The rules say you can only sign up if you already have a child. Those who are pregnant now (or their partner) can sign up, if it’s a second child, but can’t officially if it’s their first (though I hear of some people who have been allowed – how that’ll play out I’m not sure).

Yet claiming childcare vouchers on childcare while on maternity can be difficult (you may be able to ask your employer to do just one £20 voucher as part of payment for a ‘keeping in touch day’ – which counts as you being in the scheme – but it could be difficult).

If I qualify for both tax-free childcare and vouchers, which is better?

Here’s a graphic I’ve stolen from my main Childcare Vouchers guide, which takes you through it.

tax fee childcare vs childcare vouchers infographic

The key thing to look at is the discount and the maximum gain. Vouchers give you a bigger saving pound for pound, but you can get a lot more tax-free childcare – for a basic-rate taxpayer it’s £2,000 PER CHILD compared to just £930 PER PARENT if you opt for vouchers.

So parents with more children and higher childcare costs are better off with tax-free childcare as there’s far more free cash available. Those with smaller childcare costs should sign up to vouchers as the discount is bigger.

I hope this helps you make a decision…