By: Tim Bennett
25.07.2018
25.07.2018
Parents with young children face an important financial choice ahead of a government rule change in October. Tim Bennett sums it up here.
Why 4th October 2018 is a key date for parents
Later this year, a new government scheme comes into effect that changes the way parents claim financial support for young children. In short, the existing childcare voucher scheme will be replaced by a new tax-free childcare scheme. Here, I take a quick look at both. Parents reading this before 4th October 2018 should note that they still have a choice about which scheme they join but will only be able to join the new scheme from that date as the childcare voucher scheme will then close to new entrants.
What is happening?
The change may be summarised as follows;
The key thing to realise about this change is that the two schemes do not work in exactly the same way so any decision to, say, abandon childcare vouchers and sign up to the new scheme needs to be taken with care.
Childcare vouchers
This scheme offers eligible parents the chance to sign up, via their employers, to receive help with childcare costs in the form of salary sacrifice to buy vouchers that can be then used at a range of registered childcare providers. Salary sacrifice in effect gives you a gross benefit for its net cost to you – so if you normally receive say £100 before tax as salary and £70 after tax (“net”), the childcare voucher scheme allows you buy £100 of vouchers for £70. It is therefore pretty tax-effective, albeit the benefit works out best for basic rate taxpayers.
When it comes to comparing this scheme to the new one (below), there are several factors to weigh up as to which will work best as they operate in different ways. For example, this scheme is of little use to anyone who is self-employed as they do not have an employer who can offer salary sacrifice. Here is a rough guide to the people the existing scheme is most likely to suit, bearing in mind that if you are in a voucher scheme before the rules change on 4th October, you are entitled to stay there after the rule change and many employers will let you sign up before then.
Tax-free childcare
This new scheme allows families to save for their childcare costs via an online account. The idea is that the government will top the account up to a maximum amount (£2,000) each year. The money in the account can then be used to pay for a range of childcare options for children up to the age of 12. Unlike the childcare voucher scheme, this one pays the same benefit to all taxpayers. However, the qualification criteria are different as this slide shows;
Given that you can’t be in both schemes simultaneously, but you can pick either before 4th October, parents will need to weigh up carefully which one is likely to offer them the most benefit. Here are some thoughts on this;
Other relevant points
Parents with young children in particular (nursery and childminder age) should note that there are a few other sources of government help available, subject to meeting the relevant criteria.
To find out more…
More information about these schemes can be found in our Killik Explains Guide on “Saving and Investing for your Family”, or via the relevant government website links that they reference. Please contact an Investment Manager, or Wealth Planner for a hard copy, or go to the website link below for a digital version.
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