Happy Family
  • 07 Jun 2017
  • jane.potter

The Government has launched an online savings account for parents to use to save for the costs of childcare, called tax-free childcare (although it has nothing to do with the amount of tax you pay).

The savings account is open to working parents who have children aged under four years (as at 31 August 2017) and those with disabled children aged under seventeen. The scheme will be rolled-out to all other UK parents of children aged under twelve by the end of December 2017.

For every £8 deposited by the parents in the account, the Government will add another £2, up to a maximum of £2,000 per child per year (£4,000 where the child is disabled). To benefit from the scheme, both parents must earn at least £120 per week, but neither must have total income of more than £100,000 per year.

The self-employed can open a tax-free childcare account; they don’t have to meet the minimum £120 per week threshold while their business is new and in a start-up phase.

The money in the tax-free child care account can only be used to pay for childcare provided by a registered childcare provider.

Many employees currently receive tax-free childcare vouchers provided by their employer worth £55 per week (£28 per week for higher rate taxpayers, £25 per week for those who pay 45% tax). This system of vouchers will remain open to new entrants until 6 April 2018 and, once in the scheme, employees can remain in it as long as their employer continues to offer it. Alternatively, employees can opt out of their employer’s voucher scheme and switch to the new savings scheme. It can be tricky to decide which would be better for your family.

If your annual income is over £100,000, you can’t join the new savings scheme, so stick with childcare vouchers if you receive them. If you are self-employed you can’t access the employer provided childcare vouchers, so you will be better off using the new tax-free savings scheme.

As a general rule, if your childcare costs are more than £2,860 per child per year, it will be worth switching to the new tax-free childcare savings scheme, but there is no substitute for doing the sums.

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