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18 June 2018

Tax Free Childcare – What is it?

Question.

As a self-employed builder with a young family, I am interested to learn more about tax benefits of childcare costs. I was reading that there are new rules in force. Can you explain how these new rules work?

Answer.

Tax-Free Childcare is a new scheme which is being rolled out gradually from April 2017 and will offer working families 20% support towards qualifying childcare costs up to certain limits. It will eventually replace the directly contracted childcare and childcare vouchers provided by employers under the Employer Supported Childcare Scheme. The scheme will eventually be open to almost two million families in the UK and is administered by HM Revenue and Customs (HMRC).

You can qualify if you are employed, self-employed or both as long as you (and your partner if you have one) earn at least £120 a week if you are aged 25 or over and each earn less than £100,000 a year and not already be receiving support through Tax Credits or Universal Credit.
You will normally qualify if you are in paid work during some periods of sick leave, maternity, paternity, adoption or shared parental leave if you were earning at least £120 a week before you went on leave. The scheme covers England, Wales, Scotland and Northern Ireland.

Under TFC the tax relief available is 20% of the costs of childcare up to a total of childcare costs of £10,000 per child per year. The scheme will therefore be worth a maximum of £2,000 per child (£4,000 for a disabled child). Parents are able to apply for TFC for children under 12 (up to 17 for children with disabilities).

Parents are able to register with the government and open an online account. The government will then ‘top up’ payments into this account at a rate of 20p for every 80p that families pay in.

For the Self-employed parents are able to get support with childcare costs using the TFC scheme, unlike employer supported childcare scheme. To support newly self-employed parents, the government have introduced a ‘start-up’ period. During this period a newly self-employed parent will not have to earn the minimum income level.

In April 2017, HMRC started rolling out the childcare service via a single website through which parents can apply for both 30 hours free childcare and TFC. All parents of eligible children are now able to apply for TFC. Parents can apply online through the childcare service which can be accessed via the Childcare Choices website.

HMRC acknowledge that over the summer some parents did not receive the intended level of service when using the website and that they have subsequently made significant improvements. For those parents who have had difficulties in accessing the service, compensation may be available: see childcare service compensation.

Only childcare providers registered with a regulator can receive Tax-Free Childcare payments.

The existing scheme, Employer Supported Childcare (ESC), will remain open to new entrants until at least September 2018 to support the transition between the schemes. ESC continues to be available for current members if they wish to remain in it or they can switch to the new scheme but parents cannot be in both ESC and TFC at the same time.

The advice above is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
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