The winners and losers under the new child care tax breaks

Parents spending more than £9,000 a year on childcare are win out under the switch from child care vouchers, with families in all tax brackets losing out if their annual spend is below £3,000, analysis from Wealth At Work shows.

Childcare - thumbnailUnder the new Tax-Free Childcare system, which came in from April 2017, sees the government contribute 20p for every 80p that parents spend on registered childcare, equating to tax-free childcare for basic rate taxpayers.

Winners under the new system are basic rate tax payer families that spend more than £9331.20 a year on childcare, higher rate tax payer families that spend more than £6249.60 a year on childcare, families with lots of children – because funding is per child, and the self-employed, who were previously not eligible for the incentive.

Losers are basic rate tax payers with access to childcare vouchers who spend less than £4,665.60 per year on childcare. If both parents pay basic rate tax and have access to childcare vouchers, they would need to collectively spend less than £9331.20 on childcare to be worse off.

Higher rate tax payers who have access to childcare vouchers and spend less than £3,124.80 per year on childcare are also worse off, although if both parents pay higher rate tax and have access to childcare vouchers, they would need to collectively spend less than £6,249.60 on childcare to be worse off.

Those earning more than £100,000 are excluded as are parents who live together, but where only one parent is working and families with children aged between 12 and 15.

The maximum government contribution per year is £2,000 per child, or £4,000 for disabled children. Parents must be in work to qualify, with each parent earning just over £100 per week, but no more than £100,000 each per year.

Parents who are already members of the current Child Care Voucher system can continue in it, providing their employer will still provide access to it. New members can also join current schemes until April 2018.

Wealth at Work director Jonathan Watts-Lay says: “Whether parents are better off with the old or new scheme depends on many factors including how much they earn, how much they spend on qualifying childcare, whether both parents work, how old their children are, and how many children they have. Parents who think they will be better off under the old scheme have until April 2018 to register with their employer, and anyone who misses this deadline will only be able to join the new scheme.”

Basic rate tax payer calculations – source: Wealth at Work

Childcare Vouchers (old system) – Maximum saving available Tax Free Childcare (new system) – same cost to parents Tax Free Childcare (new system) – same saving Tax Free Childcare (new system) – Maximum Saving per child Tax Free Childcare (new system) – Maximum saving for two children
Cost to parents £3,965.76 £3,965.76 £7,464.96 £8,000.00 £16,000.00
Saving £1,866.24 £991.44 £1,866.24 £2,000.00 £4,000.00
Childcare Value £5,832.00 £4,957.20 £9,331.20 £10,000.00 £20,000.00

Higher rate tax payer calculations

Childcare Vouchers (old system) – Maximum saving available Tax Free Childcare (new system) – same cost to parents Tax Free Childcare (new system) – same saving Tax Free Childcare (new system) – Maximum Saving per child Tax Free Childcare (new system) – Maximum saving for two children
Cost to parents £1726.08 £1726.08 £4999.68 £8,000.00 £16,000.00
Saving £1249.92 £431.52 £1249.92 £2,000.00 £4,000.00
Childcare Value £2976.00 £2157.60 £6249.60 £10,000.00 £20,000.00

Combined basic rate and higher rate tax payer calculations – With the old scheme basic rate parents are able to buy £243 and higher rate tax payers £124 of Childcare Vouchers each month, so a total of £4404.00 for the year. This means that they can pay for £4404.00 of childcare, but it only costs them £2845.92, as there is a combined tax and NI saving of £1558.08. Under the new scheme £2845.92, added to the 20% top up from the government, will only pay for £3557.40 of childcare (a difference of £846.60). Parents are therefore better off under the old scheme, until they are spending £7790.04 a year on childcare.

Childcare Vouchers (old system) – Maximum saving available Tax Free Childcare (new system)– same cost to parents Tax Free Childcare (new system)– same saving Tax Free Childcare (new system) – Maximum Saving per child Tax Free Childcare (new system) – Maximum saving for two children
Cost to parents £2845.92 £2845.92 £6232.32 £8,000.00 £16,000.00
Saving £1558.08 £711.48 £1558.08 £2,000.00 £4,000.00
Childcare Value £4404.00 £3557.40 £7790.04 £10,000.00 £20,000.00

Higher rate tax payers that signed up before April 2011 – If parents signed up for Childcare Vouchers before April 2011, and are still with the same employer, they are eligible to buy £243 worth of vouchers a month (as opposed to the £124 which was introduced from April 2011 for higher rate tax payers), so a combined amount of £5832.00 a year. This means that they can pay for £5832.00 of childcare, but it only costs them £3,382.56, as there is a combined tax and NI saving is £2,449.44.

Under the new scheme £3,382.56 added to the 20% top up from the government, will only pay for £4228.20 of childcare (a difference of £1603.80). Parents are therefore better off under the old scheme, until they are spending £12247.20 a year on childcare. 

Childcare Vouchers (old system) – Maximum saving available Tax Free Childcare (new system) – same cost to parents Tax Free Childcare (new system)– same saving Tax Free Childcare (new system) – Maximum Saving per child Tax Free Childcare (new system) – Maximum saving for two children
Cost to parents £3382.56 £3382.56 £9797.76 £8,000.00 £16,000.00
Saving £2449.44 £845.64 £2449.44 £2,000.00 £4,000.00
Childcare Value £5832.00 £4228.20 £12247.20 £10,000.00 £20,000.00

Additional Rate Tax Payer calculations – With the old scheme parents are able to each buy £110 of Childcare Vouchers each month, so a total of £2640.00 for the year if both are additional rate tax payers. This means that they can pay for £2,640.00 of childcare, but it only costs them £1,399.20, as there is a combined tax and NI saving of £1,240.80. The new Tax Free Childcare system is not available to parents who earn more than £100,000 a year. This means that additional rate tax payers who are unable to sign up to a voucher scheme will be up to £1240.80 worse off a year.

If they signed up for Childcare Vouchers before April 2011, and have not left the scheme at any point since this date, they are eligible to buy £243 worth of vouchers a month, so a combined amount of £5832.00 a year. The combined tax and NI saving is £2,741.04, meaning that for a net cost of £3,090.96, they can pay for £5832.00 of childcare. As they do not have access to the new scheme, unless they can remain in the old voucher scheme they will be missing out on a saving of up to £2741.04 a year.

Childcare Vouchers (old system)   – Maximum saving available (MSA) Childcare Vouchers (old system) – MSA for those signed up pre April 2011
Cost to parents £1399.20 £3090.96
Saving £1240.80 £2741.04
Childcare Value £2640.00 £5832.00