Plans to scrap Government childcare vouchers have been delayed by six months. Offered by employers, they can save parents up to £930 a year.
The scheme was set to close to new entrants on April 5 and be replaced by tax-free childcare, which entitles families to claim up to £2,000 a year per child.
But not all will be better off under the new system: some middle-earners could lose up to £500 a year – and those who don’t spend large amounts on childcare cannot get the full benefits.
MPs asked for a rethink, saying it disproportionately benefited the rich. The voucher scheme will stay open for another six months.
Plans to scrap Government childcare vouchers have been delayed by six months
Childcare vouchers vs tax-free childcare
A new scheme called Tax-Free Childcare has been launched to replace childcare vouchers but for 40 per cent taxpayers and basic rate taxpayers who don’t spend large amounts on nursery, or breakfast and after school clubs it is likely to prove much more stingy.
The idea behind both is to give a helping hand to parents who have to work, meaning that they save some tax on money they spend on Britain’s expensive childcare.
The vital difference between the two schemes is that childcare vouchers allow you to save both income tax and national insurance through salary sacrifice, whereas the tax-free childcare scheme requires you to pay money in and then get a top up bonus of £20 for every £80 paid in.
Many employed people will be better off staying in childcare vouchers – or signing up for them before it is too late.
If you pay higher rate tax you get a better benefit from childcare vouchers and even at basic rate tax, because it is salary sacrifice you save both tax and NI, amounting to 32 per cent in total, whereas the new system only gives a 25 per cent uplift equivalent to getting basic rate tax back.
The self-employed were not allowed vouchers, so the new system is good for them
Thew new scheme is also being promoted slightly disingenuously by the Government, which has been highlighting the ability to get up to £2,000 of childcare tax-free per child compared to the old system’s maximum £933 saving.
However, to benefit from that £2,000 you would have to be spending £10,000 a year on childcare (£8,000 plus the £2,000 bonus).
With childcare vouchers you get the tax benefit, however much you spend on childcare. It is £600 cheaper for two working parents to pay for £5,000 per year of childcare with vouchers rather than with the new system.
If you spend a lot on childcare, the new system could pay off, however.
Vouchers bought through salary sacrifice from pre-tax income
Saves basic rate payers 20% income tax plus 12% NI – total 32%
Saves higher rate tax payers 40% income tax plus 2% NI – total 42%
Maximum annual saving of £933 for basic rate and £625 higher rate
Not available for self-employed
Better for those spending smaller amounts on childcare
Tops up every £80 paid in by £20 to turn it into £100
Saves equivalent of 20% income tax
Tax saving of up to £2,000 per child per year
Only available if both parents work
Not available if either parent earns more than £100,000
Better for those spending large amounts on childcare