Which childcare scheme will save you more money?
There's no doubt children are expensive, whether it's the endless stream of nappies or the clothes that last for hours before being reduced to tatters.
But for many parents, it's the additional cost of childcare that really hits their finances. According to the Family & Childcare Trust, even part-time childcare costs are outstripping the average mortgage.
In its 2014 survey on childcare costs, it says that for a family with two children, the cost for one child in part-time nursery care and one in an after-school club is £7,549 a year compared to the average UK annual mortgage repayment of £7,207.
But parents who face paying crippling nursery, nanny or childminder costs are being offered a helping hand from the government, with a new tax break for childcare planned for autumn 2015. The new Tax-Free Childcare scheme will enable eligible working parents to benefit from a government contribution worth 20% of their payments.
So parents paying the maximum £8,000 per child a year into the scheme could get a tax break worth £2,000.
It sounds like a simple choice for the estimated 1.9 million families who will qualify for the new scheme.
However, the decision is not so straightforward for those who have the option of joining an existing childcare voucher scheme operated by their employer – or already belong to one. They need to do their sums before deciding which type of scheme to opt for.
The biggest advantage of the new scheme for many families is its accessibility. Parents – including the self-employed – will be able to buy vouchers online through an account run by National Savings & Investments, paying on a monthly or quarterly basis.
To be eligible, single parents or both parents from a two-parent family must work at least eight hours a week earning the minimum wage, or just over £605 a quarter. Although both parents must provide their employment details, only one can open and run an account.
The tax break of 20% is the same for everyone earning up to £150,000 each. People earning over this limit are not eligible.
But the more children you have, the more you could benefit. Although the government has set a maximum tax saving of £2,000 per child, there is no limit to the number of children that parents can buy childcare for.
Each child will need his or her own account, and the new scheme can only be used to pay for Ofsted-regulated childcare – not informal care by friends or relatives. This also means families where one parent stays at home with the children will not qualify for the tax break.
Once enrolled for the scheme, parents will continue to be entitled to support for three months, even if their circumstances change. But they then have to reconfirm that they still qualify. Although this is likely to be irritating, it's intended to reduce the need for parents to repay money when they become ineligible, avoiding the chaos suffered by many who had to repay Child Benefit after the rules changed in 2013.
Children must be less than 12 years old to qualify – eligibility ends in the first week of September after the child's 11th birthday. Children who are disabled will continue to be eligible until age 16.
Parents who benefit from Tax Credits or Universal Credit will not be able to use Tax-free Childcare but the government will meet 85% of the childcare costs of parents on Universal Credit, provided they work and earn more than the personal tax allowance each year.
The current scheme
Existing childcare voucher schemes are operated by employers on a voluntary basis. Even though employers benefit from a chunky reduction in their National Insurance (NI) bill, only 5% have opted to offer their staff this benefit, with about 450,000 families buying vouchers. This means self-employed parents aren't eligible.
The scheme works by the employee sacrificing salary to buy vouchers – buying vouchers from gross salary without the deduction of tax or National Insurance. Vouchers can be bought for children up to the age of 15.
Each parent is entitled to his or her own allowance, which varies in size according to their tax rate and the date when they joined the voucher scheme. The number of children they are buying vouchers for makes no difference.
A basic-rate taxpayer can buy up to £243 of childcare vouchers each month, saving £933 in tax and NI a year, regardless of when they joined the scheme.
Likewise, parents who are 40% and 45% taxpayers and were already in a scheme by 6 April 2011 can buy vouchers worth £243 a month, saving up to £1,225 and £1,370 in tax and NI a year respectively. To continue making these savings, they must remain in the same employer's scheme continuously.
Higher- and additional-rate taxpayers who joined their employer's scheme after 5 April 2011 are limited to buying vouchers worth £124 and £110 a month respectively, and save just £623 each a year.
Calculating the benefits
Once the new system is introduced, parents who are in existing childcare voucher schemes can choose whether to switch or stay put. To work out how much you will save through the new scheme, just multiply the cost of your childcare bill - up to a maximum of £10,000 per child per year - by 0.2 to give you the 20% saving.
Calculating the benefit of the old scheme is more complicated because you also save on NI - worth 12% for basic-rate taxpayers. Try filling in your details on a childcare savings calculator provided by websites such as Computersharevoucherservices.com.
As a rule of thumb, parents will be better off in the new scheme if they have high childcare costs, according to the childcare voucher operator Kiddivouchers. It believes parents will only be better off in the new tax-free scheme if their care costs are higher than those in the table below.
Will you be better off in the new scheme?
|Family circumstances||Level of monthly childcare costs after which Tax-Free Childcare becomes the better option|
|Single parent, basic-rate taxpayer||£389|
|Single parent, higher-rate taxpayer, joined childcare vouchers before 6 April 2011||£510|
|Single parent, higher-rate taxpayer, joined childcare vouchers after 5 April 2011||£260|
|Couple, both basic-rate taxpayers||£778|
|Couple, one basic-rate taxpayer, one higher-rate taxpayer who joined childcare vouchers after 5 April 2011||£649|
|Couple, both higher-rate taxpayers who joined childcare vouchers after 5 April 2011||£521|
If your employer's scheme offers bigger savings, you need to enrol before the new scheme starts in autumn 2015, when existing schemes close to new members.
The true cost of childcare
- The cost of sending a child under two to nursery part-time (25 hours) is now £109.89 a week in Britain or £5,710 a year.
- For a family with two children in full-time childcare, the yearly bill is £11,700. This makes childcare costs 62% higher than the cost of the average annual mortgage repayment for a family home (£7,207).
- Over the past five years childcare costs have risen 27%, meaning parents pay £1,214 more in 2014 than they did in 2009.
- Most parents buying full-time care contribute 20 to 30% of their gross income on childcare. The average cost of an after-school club is now £48.19 a week in Britain or £1,830 a year. Source: The Family and Childcare Trust.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
A special government scheme operated through employers that allows you to pay for childcare from your PRE-tax salary. The vouchers cover childcare up to 1 September after your child’s 15th birthday (16th if they are disabled) and can be used at any registered and regulated nursery, playgroup and for nannies, childminders or au pairs.