Which is better? Tax-free childcare or childcare vouchers?

Last month we again highlighted why the cost of childcare is such a key concern for working parents, and why this in turn poses a major problem for UK employers. That post can be read here.

So we hope that most employers would accept that enabling their employees to access state financial support for the cost of childcare is important. The UK is of course currently awaiting further announcements from HM Government regarding a new initiative to achieve just this; Tax Free Childcare. It is quite possible that this topic will again surface in the Chancellors’ March Budget statement, so now might be a good time to review the recent progress of this policy.

Let us firstly bring together the three changes to Tax Free Childcare announced last year. In chronological order they ran like this:

March 2015
The Chancellor announced that:“The government has doubled the maximum amount that parents of disabled children will be able to receive to help pay for their childcare costs, from £2,000 to £4,000 per disabled child per year.”

July 2015
The government announced that the introduction of Tax Free Childcare would be delayed from the autumn of 2015 to “early” 2017.

November 2015
Access to state support through Tax Free Childcare was altered slightly. The criteria for access were changed to: “An upper income limit of £100,000 [per annum] and a minimum weekly income level per parent equivalent to 16 hours (worked at the National Living Wage).”

So three important changes over the course of the 2015 calendar year.

Yet despite these clarifications the key question remains: which is better, Tax Free Childcare or Childcare Vouchers?

The problem with this question is it is very much a case of comparing apples and pears – particularly as Tax Free Childcare limits payments by the number of children in a family, whereas Childcare Vouchers is limited by parental access to the facility via the employer.

The levels of financial support are different as well. For instance Childcare Vouchers provide more financial support for families with relatively modest monthly childcare costs. Whereas Tax Free Childcare provides potentially much larger amounts of state money, but only when the childcare costs are themselves significantly higher. For a table of some of the differences between the offerings please click here.

Factors that come into play when comparing the two offerings include the employed status of parents, the date childcare vouchers commenced, whether tax credits are being claimed, marginal rates of income tax, maximum and minimum salary levels, the number of children in the family, and the childcare spend each month or year. As such, the calculation for each and every working family unit will vary.

It is however clear that each offering is advantageous to some family groupings.  A two parent family with only one income earner will be able to utilise Childcare Vouchers, but is unable to use Tax Free Childcare. The reverse is true for self-employed parents.

So it is all rather confusing – the more so since we expect the final details on Tax Free Childcare may yet include more changes from the original proposals. In the meantime it is helpful that Childcare Voucher provider Sodexho has produced this calculator* which helps reduces the variables and gives working parents a useful guide to which scheme will best suit them.

We would encourage employers to share this tool with their working parents to ensure that each family is aware of the two offerings, and will be able to make an informed decision as to which vehicle will provide their family with the most state financial support towards the cost of childcare. It is however worth pointing out that until we have a confirmed date for the introduction of Tax Free Childcare, the only option currently available remains that of Childcare Vouchers. It follows that employers should actively offer and promote such a facility at this time.

It is also particularly important to note that the Tax Free Childcare proposals have been clear that employees will only be able to retain access to Childcare Vouchers if they commence saving through this mechanism before the introduction of Tax Free Childcare. So another reason to promote the existing benefit whilst it is still available.

We will of course keep you posted on the progress of this initiative during the course of 2016 and the launch in 2017.

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For the full original article and other similar posts, please visit the Jelf Group blog.

*Please note: Jelf Employee Benefits are not responsible for this calculator, so this should only be used as an initial guide by working families as to their childcare support options.