Government help with the cost of childcare will be rolled out to nearly two million households – twice as many as are currently entitled to help – from autumn 2015.
The Tax-Free Childcare scheme means that for every 80p put into an account for paying childcare costs, the government will top up an extra 20p.
The government will top up the account with 20% of childcare costs to a total of £10,000 – the equivalent of up to £2,000 support per child per year.
According to Gov.uk, "this is equivalent to the tax most people pay – 20% – which gives the scheme its name, 'tax-free'".
However, political commentators have been quick to argue the scheme is anything but tax-free.
Fraser Nelson, editor of The Spectator, said: "For 'most people' the payment (and it is a payment, not a tax refund) will be the same as the income tax they pay. But this is not the same as making it tax-free.
"For a start, it doesn't refund the other taxes on wages: employers' NI, the NI paid by workers directly. Nor will it exempt the parent from paying the taxes for hiring the nanny, which can work out a third of their wage."
That said, the scheme itself has been broadly welcomed by consumer groups, childcare experts, and Nelson – particularly as it raises the amount of help per child from £1,200 under the existing Employer-Supported Childcare scheme (which included childcare vouchers and other support) to £2,000 and will also be available to the self-employed.
Ben Black, founder of My Family Care, said: "The change to childcare is broadly good news. Working parents on the whole will benefit from the legislation as it will mean that everybody who is working will be able to take advantage of tax breaks – not just those companies signed up to the scheme. It will also mean that parents have to find their own childcare voucher provider which will open up a lively and competitive marketplace where service will count just as much as price.
"The really good news is that employers will need to decide if and how they want to support their working parents. There will be no more hiding behind a childcare voucher scheme as an excuse for doing nothing else."
Julia Unwin, chief executive of the Joseph Rowntree Foundation, added: "Our research shows that childcare costs have risen by 37% in the last five years, so we welcome the government taking steps to tackle this huge expense for families."
She added: "However, it is worrying that the money used to fund tax-free childcare will be offset by savings elsewhere within Universal Credit. Additional help for childcare for low-income families should not be funded by cutting their support elsewhere. Of the new childcare funding, £750 million is being used for tax-free childcare for potentially very high earners – only £200 million will support those who are worse off. Funding for childcare for poorer families must be prioritised. In the longer term, we need to reform the current patchwork of childcare funding."
Some more information about the new scheme:
- Parents will need to open an online account via Gov.uk to pay money in to cover the cost of childcare with a registered provider.
- The scheme will be available for children up to the age of 12, and children with disabilities up to the age of 16.
- To qualify, parents will have to be in work, earning just over an average of £50 a week and not more than £150,000 per year.
- Any eligible working family can use the Tax-Free Childcare scheme – it doesn't rely on employers offering it.
- The scheme will also be available for parents who are self-employed. To support newly self-employed parents, the government is introducing a 'start-up' period, during which parents won't have to earn the minimum income level of £50 a week.
- If you currently receive Employer-Supported Childcare then you can continue to do so. Employer-Supported Childcare will continue to run but parents won't be able to register for it after the introduction of the new scheme in autumn 2015. Those already registered by this date will be able to continue using it for as long as their employer offers it.