Budget 2014: Tax-free childcare scheme extended

19 March 2014

George Osborne has confirmed a raft of improvements to the so-called 'tax free' childcare scheme it announced this time last year.

Under the new scheme the government will meet 20% of childcare costs, worth up to £10,000 and saving parents as much as £2,000 a year per child. This is an improvement on the initial proposals, where benefits were capped at £1,200. But perhaps the more significant amendment is that the scheme will now be available to children under 12. Originally, only the under-5s would have been eligible in the first year, with the scheme only gradually extending to older children by 2020.

The news will be welcomed by working parents who, according to the Family and Childcare Trust, are spending more on childcare than they are on the mortgage. It said that the average cost of a part-time nursery place and after school care for a family with two children racks up to £7,549 a year, compared to typical mortgage repayments of  £7,207 a year.

Currently working parents are able to buy childcare vouchers from their employers. These allow employers to purchase vouchers to pay for childcare from their pre-tax income.

Basic rate taxpayers are able to buy £243 worth of vouchers each month saving one parent £933 a year or £1866 if both parents participate.

Higher rate taxpayers are only able to buy £124 in vouchers each month creating savings of £623 a year or £1246 for working couples.

However, under a protected rights agreement, higher rate taxpayers who joined their scheme before 6 April 2011 (when the scheme benefits were scaled back) can still purchase £243 worth of vouchers and achieve the higher level of saving.

Under the new scheme parents will no longer be dependent on their employer for offering vouchers meaning more families will be able to participate. The self-employed will also be eligible for the first time. As a result the government reckons the number of families that will benefit should double to almost two million.

The government's new scheme is expected to launch in Autumn 2015 and will be open to all parents earning up to £150,000 a year.

Parents in the current voucher scheme will need to decide whether they will be better off remaining in it (which they can do, for as long as they remain with their current employer) or switching to the new scheme.

Which scheme offers the highest level of savings will depend on how much you spend on childcare and how many children you have. Also families can currently buy vouchers even if only one parent works, but this won't be an option on the new scheme.

Julia Unwin, chief executive of the Joseph Rowntree Foundation welcomed the announcement but questioned whether help should be going to wealthier families.

"It is worrying that the money used to fund new childcare proposals 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."

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