By Will Hadwen, Legal Adviser in the Working Families helpline team
We have noted previously on this blog how childcare costs are soaring as a proportion of family income, making it harder for parents to see the benefit of extra hours of work. Well, there’s some good news. But it’s complicated.
In the recent Budget, the Government announced that its Tax-Free Childcare scheme will be more generous, and come in more swiftly, than previously announced. The £750 million a year “Tax-Free Childcare” scheme will provide up to £2,000 per child each year, by meeting 20 per cent of childcare costs up to a maximum of £10,000 annually. It will now start in late 2015, and within a year will cover all children under 12 when both parents work.
In addition, from 2016 support for childcare costs within the new Universal Credit, currently 70 per cent of capped amounts, will be 85 per cent for all parents. This is something that Working Families and a coalition of organisations including the Child Poverty Action Group, Citizens Advice, Gingerbread, the Resolution Foundation, and the TUC have been calling for, and is a rare but very welcome example of ministers having listened and responded positively to our concerns.
And finally, 15 hours of free early education, already available for three- and four-year-olds and disadvantaged two-year-olds, will be extended to around 40 per cent of two-year-olds from September 2014. (This is in England only, as early years provision is a devolved responsibility).
So, what does this mean for parents?
First of all, if you are already in an employer-supported voucher scheme, you will be able to stay in that scheme if you choose to do so. But if you would be better off in the new Tax-Free Childcare scheme, then that will be an option from 2015. Although some people still won’t get help (for example, where only one partner works), the new scheme will support far more people than the current voucher scheme, as it does not depend on employer involvement – so self-employed parents, and parents whose employer does not offer a voucher scheme, can all benefit.
Who will be eligible for Tax-Free Childcare?
The scheme will start in autumn 2015. Parents will be eligible if:
- They have children under 12, or disabled children under 17 (in fact eligibility ends in the first week of September following the 11th or 16th birthday). Originally, the scheme was going to come in for younger children first, but now the government say it will be open to all eligible parents within the first year of the scheme being introduced.
- They are in paid work. Where you have a partner, both you and your partner must work, but the test is very flexible. You need to work for at least 8 hours a week at the minimum wage, and you’ll also be treated as working if you are on maternity leave, paternity leave, receiving Carer’s Allowance, on sick leave or someone with limited capability for work.
- Neither parent is receiving Universal Credit, or childcare support from another source (for example, the voucher scheme, or a childcare grant for student parents)
- Neither you, nor your partner if you have one, are additional rate taxpayers (income over £150,000).
Some parents may need support deciding whether to use Tax-Free Childcare or Tax Credits (or, in the future, Universal Credit). The government has said that it will provide support for people making these decisions, but if you’re wondering how this will affect you, here are a few general points:
- Where two parents in a family are both in a voucher scheme with their employers, then with one child it will make sense to stay in the voucher schemes. The maximum help you can get in this situation is greater, and the proportion of help you get (effectively 32 per cent for a basic rate taxpayer, because you won’t pay tax or national insurance on the voucher value) is greater than the 20 per cent in Tax-Free Childcare
- Even if two parents are both in a voucher scheme, once you have two children it will become less worthwhile to stay in the scheme. The maximum help you could get in Tax-Free Childcare is greater, but which is better for you overall would depend on how much you’re spending (see below).
- If you’re a single parent, or only one partner is in a voucher scheme, then again, the maximum amount of help you can get in Tax-Free Childcare will always be more than you get by using the vouchers (but see below).
- At the moment, some people can get help via vouchers and tax credits, because you can deduct the value of the voucher from your childcare costs when declaring them to HMRC, and your taxable income is lower. If you’re doing this, you will definitely need advice come 2015!
- Workplace nurseries are not affected by Tax-Free Childcare. If you pay for a workplace nursery, the tax advantage is greater than in the voucher scheme, so you’re probably better off sticking with it (and you could still use Tax-Free Childcare if you use other qualifying childcare outside of the workplace nursery)
- Where none of your employers offer a voucher scheme, you’ll benefit from the chance to use Tax-Free Childcare, but like everyone you should check whether you’ll be better off in Tax Credits or, in the future, Universal Credit.
How much do you spend?
Let’s say that you’re currently in a childcare voucher scheme, and you’re a single parent, or the only person in a couple whose employer provides a scheme. You don’t qualify for tax credits (and won’t qualify for Universal Credit in the future). But you’ve noticed that 32 per cent (the tax and NI saving on a voucher for a basic rate taxpayer) is more than 20 per cent (the top-up help from government within ‘tax free’ childcare).
You’re right, but because the maximum voucher value is £243 a month (and you don’t get a greater saving if you have more than one child), there’s a point at which you will still be better off in the new Tax-Free Childcare scheme. Once you are spending more than £4,665 a year on childcare, you should think about going to the new scheme (20 per cent of that is £933, which at current rates is the benefit you’d get from tax and NI saving in the voucher scheme).
So, should we be celebrating? Clearly, many parents stand to benefit from the changes announced in the Budget. But the Government’s watchdog on child poverty – the Social Mobility and Child Poverty Commission – has warned that these changes will “help the rich at the expense of the poor”. Observer journalist Yvonne Roberts notes today that, whilst the proposed Tax-Free Childcare scheme would “help 900,000 families on very low incomes” it would also benefit “a couple with a joint income of up to £300,000” and therefore “adds to the distortions and inequities in the childcare market”. And Dalia Ben-Galim of the Institute for Public Policy Research think tank notes that:
Overall, an expanded system of tax-free childcare is still regressive, skewed to benefiting higher income families and doesn’t necessarily secure lower costs for parents or government. In fact, IPPR analysis shows that tax-free childcare on its own will not make childcare more affordable for families.The Government has not got a plan to regulate the childcare market, nor control prices for parents, which makes pumping tax relief into the system a short-term fix with long-term price rise consequences.
In a report out today, Citizens Advice argues for a further increase in the level of support for childcare costs within Universal Credit, to 90 per cent. Citizens Advice suggests that the £1.5 billion cost of this and its other recommendations – including free school meals for all children in households in receipt of Universal Credit – could be met by increasing the so-called taper (the amount that Universal Credit is reduced for every £10 extra earned) from £6.50, to £7.00.
Given that they have just changed their plans, it’s hard to see ministers embracing this call with open arms. But stranger things have happened, and in any case it’s not yet certain that either Universal Credit or the Tax-Free Childcare scheme will actually happen. Before either are due to be fully in force, there is the little matter of the General Election in May 2015. And the next government might well decide to go down different paths.