Tax-free Childcare - will you be ready?

A new Tax-free Childcare scheme will be launched in Autumn 2015 which will enable working parents to receive a 20% contribution from the Government towards their childcare costs. Once this scheme is introduced, it will not be possible for employers to establish a new childcare voucher scheme or allow new entrants to join an existing voucher scheme.

So what will this change mean for employers and their employees? This guide takes a closer look at Tax-Free Childcare and the implications for both new and existing employees.

1. What is Tax-free Childcare? Parents will be able to open their own childcare account online and pay money into this account. The Government will top up payments at a rate of 20%, up to a limit of £2,000 per child per annum. In short, for every 80p paid in by parents, the Government will top up the payment by 20p.

2. What role will employers play in the new Tax-free Childcare scheme? The new Tax-free Childcare scheme will operate directly between parents and the Government, so employers will not be required to play any part in the administration of this scheme.

3. Can employers continue to operate their childcare voucher scheme following the introduction of the Tax-free Childcare scheme? Yes, provided the childcare voucher scheme was already in operation and the employees remain employed with the same Company. However, once Tax-free childcare has been launched, it will not be possible for an employer to establish a new childcare voucher scheme or allow new entrants to join an established childcare voucher scheme.

4. What happens if an employee is already enrolled in a Childcare voucher scheme (once the Tax-free Childcare has been launched) and they decide to commence work with a different employer? Since new entrants to an established childcare voucher scheme are not permitted, they would need to set up an on-line account with the Tax-free childcare scheme.

In view of these changes, working parents will need to consider whether or not they are likely to be better off with Childcare Vouchers or Tax-Free Childcare. If they are not already enrolled in a childcare voucher scheme, serious consideration should be given to this before the door firmly closes on this opportunity.

Looking ahead to 2016, some families are also set to benefit from The Childcare Bill which will double the free childcare available for all working parents of 3 and 4 year olds to 30 hours a week – worth around £5,000 per year – including the £2,500 they can already save from the existing free childcare scheme.