Tax Free Childcare – Flawed in its early adoption

The governments new tax free childcare system was launched in April 2017 by HM Revenue & Customs, but its introduction has been far from a smooth procedure. The scheme has been met with resistance from parents and finance experts alike, as processes stalled and it called into question what real economic benefit the tax structure would provide.

So, what does the scheme offer? It was devised to make life easier for working parents, who have been encouraged to register for the tax subsidy themselves, increasing the accessibility of childcare benefits to those who are on national living wage or are self-employed. Once registered for the initiative, the government will cover up to £2,000 of childcare costs every year, contributing 20% of a £10,000 annual childcare bill. For those with disabled children, this increases to 40% of the yearly fee. The tax relief covers most types of childcare, but they must be registered with the initiative in order for the subsidies to be paid.

Initially, it has been made available to parents with children aged four and under, before it is rolled out to those with children under 11 before the turn of the year. To qualify for the tax relief, a parent must earn more than £120 per week and not more than £100,000 annually. As for the self-employed parent, their earnings must exceed £120 per week over an average of the most recent three months. In addition to this, parents of children aged between three and four can apply for 30 hours of free childcare per week, starting this September.

However, recent discussions have highlighted some of the flaws that this system is operating with. Many families have reported problems with glitches in the online service that the government has launched as part of the scheme, with payments delayed in reaching childcare providers. In some circumstances, parents have been unable to access the money deposited into the scheme, leading them to effectively having to pay fees again to avoid late payment charges. Whilst a dedicated helpline is available, the government has so far been unable to provide a long-term fix to the technical difficulties.

Will the new scheme save you money? The answer to this lies in the decision of whether to continue to use benefits provided by your employer or to take up the government on this new venture. Of course, if you are self-employed or are without an employer who provides such benefits, this new initiative is going to save you money. But if you already receive childcare vouchers from your employer, should you make the switch? Martin Lewis, founder and executive chairman of the Money Saving Expert online advice service, suggests that if you are a basic rate tax payer with childcare expenses less than £9,336, then no, you will not save money by adopting the government’s new scheme. Likewise, if you are a higher rate tax payer, with childcare costs below £6,252 a year, then again, you will not save money under the new initiative.

Information Provided by: The Sunday Times
Image Provided by: Wikimedia Commons


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