Guide to Childcare Vouchers

Read our handy guide which explains you everything you should know about tax-free childcare and who qualifies.

The tax-free childcare voucher system can seem to be daunting, and as such, it is often regulated through employers, it may appear like a scheme which is only applicable to those in traditional employment. However, a new scheme came into effect in the 2014 budget and got effective into operation in October 2015 when it will be extended to include self-employed individuals which involve contractors.

How does the current childcare voucher scheme work?

The only way self-employed individual benefits from the tax-free childcare voucher system was if they were registered as a limited company until the changes come into effect. They would have to search a childcare provider and pay their bill through the company for getting entitlement to tax reliefs on the sums involved and minimize the total amount of corporation tax due. The existing system of employer-supported childcare will continue to operate, and existing users will be able to select whether they want to switch to the new scheme or not.

How will the new childcare voucher scheme work?

The scheme has already arrived in the autumn of 2015 that has allowed parents to buy childcare vouchers which will permit them to pay for childcare. The government contributes 20 pence for every 80 pence a parent puts in which goes up to a limit of £10,000, means that a parent can benefit from £10,000 worth of childcare which cost to them of £8,000 with a £2,000 subsidy.

Initially, this childcare can be used for any children under the age of five, then turn out to be for those aged up to twelve, with an extension for children with disabilities who will be backed by until the age of seventeen. The scheme will work under a system of quarterly entitlement whereby recipients will have to prove that they’re entitled to support every three months by confirming their details and ongoing status. This means that there will be no requirement for parents to notify HMRC of any changes in their situations as and when they happen, as is essential for tax credits. Any changes to a person’s status can be updated during their quarterly entitlement update.

Who will qualify for this scheme?

The scheme is meant to help working parents who pay for childcare, although not every working parent will get entitled to. For example, if both parents live in a household, then both will have to work for getting entitled for the tax-free voucher scheme, whilst a parent on parental leave will be preferred ‘in work’(includes paternity leave, maternity leave, and adoption leave) and those in receipt of specific benefits will still be entitled to.

You will need to earn a minimum amount of over £50 per week on average, and you can claim this benefit until you reach the upper limit of £150,000. However, in order to induce parents who work for themselves to utilize the scheme, the minimum £50 weekly will be waived for those who are registered as self-employed.

How will the process work?

The objective of the scheme is to offer an easy and simple way for parents to obtain the funding, so it has been meant to make it as simpler as possible to use. There comes a place where parents can register to join the scheme, make payments into their accounts and make essential arrangements for their childcare provider to be paid. They will be able to view the details of all their children’s accounts at the same place.

One of the most amenable traits of the new scheme is that it is much more adaptable than its predecessor. Users can devote as much attention whenever they want, meaning they can top up their account with additional funds to be used in times when they are liable to use more childcare such as the summer holidays. It doesn’t even have to be a parent who pays attention—if the household is entitled then anyone can add to the fund, which includes employers, grandparents or any other party who wishes to contribute to childcare costs.

Users can also withdraw funds whenever they require, whether that’s because you no longer use childcare or your financial situations change and you wish to exhaust some of your funds. This means that you can withdraw some of the capital from your account and the government will take out their equivalent contribution. Parents will be able to access the scheme for free as there will be no fees involved in the accounts administration.

For most of the people, childcare is one of the substantial household outgoings, so being able to access tax-free help with the bills is an actual bonus. Your accountant will be able to give you further advice on how you can use other tax efficiencies as a self-employed individual, director or contractor of your own limited company.

To claim childcare vouchers as a contractor, contact Nexa Accountants team on: 020 3004 9303.