Tax Savvy Family Finances – Childcare Costs

Raising a family is a serious financial undertaking, with the average cost of taking a child from birth to 21 now placed at around £230,000. An important early consideration for many of us is how to best go about funding childcare while we go out and find the bacon to bring home.

The government has long recognised that this is an area that many parents need a helping hand with and a number of strategies have been attempted over the years. The latest decision that needs to be made is between childcare vouchers and the tax-free childcare scheme that will be launching in 2017.

Childcare vouchers

The maximum saving here is £933 per parent or £1,866 per family, although the amount you could save obviously depends on your personal circumstances.

If you were to spend £100 on childcare as a basic rate taxpayer, you could save £32. To be eligible parents must be earing above the minimum wage once the value of the childcare vouchers has been deducted through PAYE salary sacrifice deductions. This means those who are self-employed are not usually able to participate in this scheme.  It is also important to point out that vouchers are non-refundable.

The potential implications of salary sacrifice should always be considered. The agreement to take home less pay each month to finance your vouchers may affect the amount of tax credits you are entitled to.

There is a government calculator available here to help parents figure out if it is worth them taking vouchers or not. Of course, we can always crunch the numbers for you.  

The scheme will be available until early 2017, when it will be replaced by the tax-free childcare and will no longer be available to new entrants. 

Tax-free childcare

The new scheme will allow parents to save 20% of childcare costs of up to £10,000 per child a year.

Again, the amount you could save will depend on your personal circumstances, but if you spent £100 you could save £20. To be eligible for the scheme parents must earn between £2,600 and £150,000 annually. Since parents will be responsible for confirming their own eligibility, the scheme will be open to the self-employed. 

As with all things financial, surface perceptions are one thing but the devil is often in the details. We can help you decide on the best strategy going forward.

Employers

For employers that want to ensure that their staff has access to benefits that are going to make their lives a little easier, there is still time to set up a childcare finance scheme. Far from being an additional administrative burden, a childcare voucher scheme is not difficult to set up and run.

First, you need to understand your tax and reporting obligations. There is an exemption limit on the amount that can be claimed by employees, as of April 2011. If you are going to provide childcare vouchers to your employees, the amount they are paid is going to reflect what you need to report and what taxes need to be applied:

For basic rate taxpayers the weekly exempt limit is £55

• The weekly exempt rate is £28 for higher rate and £25 for additional rate taxpayers

• for employees earning up to £8,500, a P9D form must be used and national insurance should be deducted from the cost of the vouchers for the employer

• for employees earning over £8,500, a P11D must be filled in and national insurance should be deducted by the amount over the exemption limit.

If you want to provide a workplace nursery where your employee’s children are looked after, you do not have to report or pay any tax as long as it fulfils a number of minimum requirements.

Whether you are a parent looking to make sure your family has the best start in life, or you are an employer wanting to give your staff help with childcare, we can help you make the right decision.

You can call Carrie Campbell on 0131 226 2233 or email carrie@thomsoncooper.com for more advice. Your first consultation with us is free.