Tax-Free Childcare: what contractors need to know

The UK’s Childcare Voucher scheme is called 'Tax-Free Childcare' and this new scheme came in from October 1st 2018, writes Sophie Tyler, team manager at Dolan Accountancy.

Before reading on, keep in mind -- this scheme will benefit some families. However there will be some families that are eligible for vouchers but not this new scheme which we discuss below. 

What is Tax-Free Childcare?

The scheme offers eligible families 20% of their annual childcare costs paid for by the government. Effectively how this works is that every 80p that you pay into a newly created childcare account, the government will contribute 20p.

This could mean that the government could contribute £2,000 as the scheme assumes a maximum £10,000 per year childcare cost per child. If you pay more than this, you will not receive any further help. So there’s an argument that there’s not much point, financially, to contribute more than £10,000.

Eligibility for the Tax-Free Childcare

There are three broad areas you’ll need to look at to determine your eligibility for tax-free childcare.

Your Childcare Provider

• Your provider must be signed up to the scheme before you can pay them and benefit from Tax-Free Childcare.

 The best way to locate a suitable provider is; in:

• England through Ofsted
• Wales through the Care Inspectorate Wales
• Scotland through the Scottish Care Inspectorate
• Northern Ireland through the local Early Years Team register

Your Child

• Your child must be under the age of 11 and be living with you. They stop being eligible on September 1st after their 11th birthday.
• Adopted children are eligible.

If your child is disabled, you may get up to £4,000 a year until they’re 17. They’re eligible for this if they:

• get Disability Living Allowance, Personal Independence Payment or Armed Forces Independence Payment
• are registered as blind or severely sight-impaired

You and Your Partner

• Must be in work -- or getting parental leave, sick leave or annual leave.
• Both of you must be earning at least the National Minimum wage or living wage for 16 hours a week (as per HMRC’s website this may affect PSCs with dividend-salary mix, as after contacting their helpline, HMRC confirmed to us that only PAYE income is considered -- not dividends)
• Are not eligible if either you or your partner has a taxable income over £100,000.

The refreshing news for self-employed sole traders  -- who are excluded from the Voucher scheme, is that they are eligible for Tax-Free Childcare. And more than that even -- the earnings limit (above) does not apply at all if you're self-employed and started your business less than 12 months ago.

This is a welcome change, as until now the government's treatment of unincorporated traders should have been better. By not allowing them access to childcare vouchers, the government was being prejudicial against sole traders, but not their incorporated (limited company) counterparts. Perhaps with Tax-Free Childcare, the government is trying to make amends in that sole traders finally can receive this perk.

So what scheme is best for you?

Final thoughts

The eagle-eyed will notice that there’s a £100k cap on the new Tax-Free Childcare scheme (whereas the vouchers don’t have such a threshold). If you’re eying the new scheme but are concerned your income is nearing the £100k threshold, then talking to accountant could be your next step. While all advisers will want to be careful not to artificially reduce salary/dividend levels, investing earnings or delaying dividends, so you are technically under the 100k cap is achievable if eligibility is your goal. In addition, the low salary and dividend-mix may affect applications for the scheme -- yet again slowly tightening the screw on the modern-day contractor.