Childcare costs can be a huge part of a family’s financial outgoings so help is often welcomed. Currently, parents have the opportunity to receive vouchers from their employer that can be used in exchange for childcare. However, there are important changes coming into effect.

As of the 5 October 2018, the childcare vouchers scheme closed to any new applicants and parents may now be able to receive tax-free childcare instead.

If you have employees already in the childcare vouchers scheme, or who joined and received their first voucher before 5 October 2018, then as long as they stay with the same employer and do not take an unpaid career break, they can keep receiving the vouchers.

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However, employees cannot continue to claim childcare vouchers if they are successfully applying for tax-free childcare.

Childcare vouchers

Under the existing childcare voucher scheme, employees and employers both benefit as they do not pay any tax or national insurance on the number of vouchers received. An employee can save between £623 and £1,370 annually, while the employer can save up to £402 for each employee in the scheme.

Offering a childcare voucher scheme also tends to ensure employees return to work after parental leave due to the reduction in the childcare costs this provides.

Tax-free childcare

The new tax-free childcare system works like this: the government will pay £2 for every £8 that a parent pays to their childcare provider, via an online account. This means parents can get up to £500 every three months (maximum of £2,000 a year) for each qualifying child.

As an employer, you will no longer be obliged to play a role in childcare costs as the new scheme operates between parents and the government. But you can choose to play a voluntary role by providing employees with information on the scheme and/or by paying into employees' childcare accounts.

If your employees qualify for tax-free childcare, they must notify you within 90 days so you can stop the vouchers.

Which is the best option?

The new scheme will enable parents to pay for childcare of up to £10,000 per child each year, which is an extra £2,000 per child (up to £4,000 if the child is disabled) each year.

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However, this new scheme won’t be favourable for everyone. The eligibility for tax-free childcare differs from the vouchers. A lot depends on how much individuals earn, how much tax they pay, and how much is paid for childcare.

Parents are eligible for tax-free childcare if they earn a minimum of £120 per week and a maximum income of £100,000 a year per parent. The maximum age of a child on the scheme has dropped to 11 (16 if disabled). This scheme is most likely to be the best option for families with more children, who ultimately face higher childcare costs.

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