UK Childcare and Tax Implications

Childcare in the UK can be expensive, with the average family spending around £7000 per year on full-time Childcare for children under two years old. The government recognizes this financial burden on families and offers several tax-free childcare schemes to help working parents pay for Childcare. This article will provide an overview of the main tax-free childcare schemes available in the UK and other tax implications related to Childcare.

Tax-Free Childcare: Tax-Free Childcare is the main government childcare scheme to help working families with childcare costs. It was launched in 2017 and replaced the previous childcare voucher schemes, which closed to new entrants in October 2018. 

Eligibility: To qualify for Tax-Free Childcare, the parent (and their partner if they have one) must:

• Earn at least the National Minimum Wage or Living Wage for 16 hours per week but less than £100,000 per year. 
• Be a citizen of the UK, EU, EEA or Switzerland 
• Not already received childcare vouchers, Universal Credit or tax credits
• Have a child under 12 years old (or under 17 for children with disabilities)

If either parent is on sick, annual, or maternity/paternity leave, they are still eligible. Self-employed parents can also qualify if they earn the minimum income level. 

How It Works: For every £8 paid into a Tax-Free Childcare account, the government adds an extra £2, up to £2000 per child per year (or £4000 for children with disabilities). This effectively provides 20% off childcare costs. Payments must be made via bank transfer into the official Tax-Free Childcare account through the government childcare service website. 

Parents can then use the funds in their account to pay any Ofsted registered childcare provider, including childminders, nurseries, nannies, after-school clubs and summer camps. The scheme covers childcare costs for children from birth until September 1st, after the child’s 11th birthday. For disabled children, it covers costs until September 1st, after their 16th birthday.

Families must reconfirm their eligibility every three months online to keep getting the top-up payments. Parents should notify any changes in circumstances, such as an increase in income over £100,000.

Tax Implications: The government top-up payments are tax-free for parents. Any money employers choose to contribute to an employee’s Tax-Free Childcare account should be paid after the deduction of income tax and National Insurance contributions. 

Childcare Vouchers: Prior to Tax-Free Childcare, the main tax-free childcare scheme was childcare vouchers which closed to new joiners in October 2018. Parents already receiving childcare vouchers can continue to use them as long as they remain with the same employer, and there is no break of 12 months or more in receiving vouchers.

With childcare vouchers, for every £1 of vouchers received, parents effectively save up to £2 in tax and National Insurance contributions. Vouchers are deducted from the salary before tax so both employees and employers can make savings. Employees can receive up to £55 per week (£243 per month) in vouchers tax-free. Higher earners may get more tax relief if they opt to use Tax-Free Childcare instead.

Parents cannot be in both Tax-Free Childcare and childcare vouchers simultaneously. If a voucher user starts claiming Tax-Free Childcare, they must inform their employer within 90 days so vouchers can be stopped. Voucher users can continue to use any vouchers they already have alongside Tax-Free Childcare payments.

Other Tax Implications

Child Benefit: Child Benefit is a tax-free payment made to parents or guardians of children under 16 years old (or under 20 years old if they are in approved education or training). It is paid at a rate of £21.15 per week for the eldest child and £14 per week for additional children. 

High-income Child Benefit tax charge: This clawback tax requires parents or guardians with an individual income over £50,000 to repay some or all of their Child Benefits in tax. With income over £60,000, the full amount has to be repaid.

Marriage Allowance: The Marriage Allowance allows a spouse or civil partner who earns less than the Personal Allowance (currently £12,570) to transfer £1250 of their Personal Allowance to their partner. This reduces their partner’s tax bill by up to £250 per year. Parents can benefit if one partner stays home to look after children while the other works.

Shared Parental Leave: Introduced in 2015, Shared Parental Leave allows both parents to share up to 50 weeks of leave and up to 37 weeks of pay in the first year after their child is born or placed for adoption. This gives parents more flexibility in dividing up childcare responsibilities. Statutory Shared Parental Pay is paid at £151.97 a week or 90% of average weekly earnings, whichever is lower.

Unpaid parental leave: Parents of children under 18 years old (or under 5 years old for parents of disabled children) are entitled to 18 weeks of unpaid parental leave per child to be taken before the child turns 18. Leave is limited to 4 weeks per year for each child.

Free Childcare Schemes: The government funds 15-30 hours per week of free Childcare for eligible 2-4-year-olds in England. The schemes are:

• 15 hours universal entitlement – All 3 and 4-year-olds in England get 570 free hours per year, usually taken as 15 hours per week for 38 weeks. Some 2-year-olds are also eligible if parents receive certain benefits.
• 30 hours extension – 3 and 4-year-olds of working parents can get an additional 570 hours per year (so 1140 hours total) if parents earn at least the National Minimum or Living Wage for 16 hours per week but under £100,000 per year.

The free entitlements can be used at participating nurseries, playgroups, childminders and schools. Parents do not have to pay taxes on the free Childcare.

Scotland, Wales and Northern Ireland have their own government-funded early learning and childcare schemes. These include:

• Scotland – 16 hours per week universal provision for all 3 and 4-year-olds, rising to 30 hours by 2020. Some eligible 2 year olds also get free hours.
• Wales – 10 hours per week for all 3 and 4-year-olds, rising to 30 hours by 2020. Some eligible 2-year-olds get 10-12 hours. 
• Northern Ireland – 12.5 hours per week for all 3 and 4-year-olds, rising to 30 hours by 2021.

Choosing Childcare: With the variety of childcare support available, families should explore all options thoroughly and use the Childcare Choices website and Childcare Calculator to determine which schemes provide the greatest savings based on their circumstances. Key factors to consider include:

• Total household income and hours worked – this determines eligibility for the different schemes
• Number of children and their ages – support varies based on the number of kids and their ages 
• Types of Childcare needed – different schemes can be used for different types of Childcare
• Flexibility in work/Childcare needed – options like Shared Parental Leave provide more flexibility
• Employer policies – larger companies may offer their own childcare voucher or support schemes.

It is possible to combine different types of support, for example, using Tax-Free Childcare payments alongside the 15 free hours entitlement. But parents should ensure they follow the rules and do not claim support from mutually incompatible schemes.

Choosing Ofsted registered childcare providers is a must for Tax-Free Childcare and the free childcare schemes. Even if not using tax-free support, registered providers offer peace of mind that staff are properly trained and children are in a safe, suitable environment. 

The Cost of Childcare

Despite the tax-free childcare schemes, Childcare remains a major expense for British families. Some key stats on the cost of Childcare in the UK:

• Average childcare costs are £263 per week for 25 hours of nursery care for a child under 2. This equates to over £13,500 per year. 
• Part-time after-school and holiday care for school-aged children averages £133 per week or nearly £7000 per year.
• The average family spends 27% of household income on Childcare for a child under two.
• In 2019, the cost of after-school clubs rose 4 times faster than wages.
• childcare costs have risen by around £ 1500 per year from 2015 to 2020.

To cover such high costs, many parents take on debt, rely on family or reduce their work hours. The government aims to make Childcare more affordable through the tax-free schemes and free entitlements. But Childcare still consumes a large proportion of family budgets in the UK.

Impact of COVID-19

The COVID-19 pandemic had a major impact on the childcare sector over 2020-2021, with closures and reduced capacity in facilities. Additional government funding was provided to nurseries to ensure their survival. Despite this, many parents struggled with Childcare, often juggling work and child supervision at home. 

During the pandemic, Tax-Free Childcare and other government support continued. In April 2021, the government temporarily removed the minimum earnings requirement for Tax-Free Childcare, meaning non-working parents could also claim support. Usage of the scheme increased over this period as parents adapted to lockdown childcare challenges.

As childcare providers recover from the pandemic, costs are likely to rise further. But parents will continue relying on tax-free childcare savings and free entitlements as vital financial support. The full impact of COVID-19 on childcare affordability and availability remains to be seen over the coming years. But government support will prove critical in enabling parents to balance work and family responsibilities.

Conclusion: Childcare is a significant expense for most working parents in the UK today. Tax-free schemes such as Tax-Free Childcare and childcare vouchers, along with free hours entitlements, provide substantial savings for families. But even with this assistance, Childcare still takes up large portions of household budgets. 

Choosing the right Childcare and maximizing appropriate government support is key to managing costs. With providers carefully selected, parents can feel confident their children are in a safe, nurturing environment while parents maintain their careers. Supportive employers and flexible work arrangements also enable working parents to juggle their responsibilities. As childcare costs look set to rise further post-pandemic, maintaining this support will be more essential than ever for UK families.

For further advice or information, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.