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Contractor Doctor: Do I have to take action about the new tax-free childcare scheme?

Dear Contractor Doctor

My partner and I are both interim management contractors, trading via a jointly-owned limited company. Because we are both typically based onsite with our clients, our youngest child spends the day with a childminder and our older child goes to before- and after-school clubs.

We currently run a voucher scheme via our limited company and, because we are both basic rate taxpayers, claim the £55 per week via salary sacrifice allowed according to HMRC. However, we saw in the Chancellor’s Budget speech in March [2013] that the government plans to introduce a new scheme in the autumn of 2015.

Do we have to take any action about the new tax-free childcare scheme announced in the 2013 Budget?

Thanks

Jamie

Contractor Doctor says:

“The short answer is no, contractors do not have to take any action about the new tax-free childcare scheme to be launched in 2015,” explains James Abbott, owner and head of tax at contractor accountant Abbott Moore.

“Contractors running existing salary sacrifice childcare voucher schemes should continue to do so. It will be possible to continue existing schemes even when the new scheme starts, although contractors may be financially better off by switching.”

However, Abbott highlights that the scheme is very much on the drawing board and a consultation will be completed before the autumn of 2015 to allow the childcare industry and other stakeholders to provide feedback on how the scheme might work in practice.

The new tax-free childcare scheme – eligibility

Although the scheme is in its infancy, according to Abbott there are some details already known. These differ from the existing childcare voucher scheme: “Under the new scheme, the qualifying criteria are tighter. Both parents have to be working, and if one of the parents earns over £150,000 the household will not be eligible.”

Contractors do not have to take any action about the new tax-free childcare scheme to be launched in 2015

James Abbott, Abbott Moore

However, on the plus side, the self-employed will now be eligible, unlike under the existing voucher-based scheme, which is only available to employees and then only if their employer actually offers a scheme.

Whilst this does not directly benefit many contractors, as the overwhelming majority are employed either by their own limited company or umbrella company, Abbott believes the take-up may be huge: “Because sole traders and partners will be able to benefit from the new tax-free childcare scheme, as many as five times more families are likely to benefit.”

How it may work

“At the moment, childcare is paid by the contractor’s employer, which is usually their own limited company or possibly their umbrella company under a salary sacrifice arrangement,” says Abbott.

The new scheme will provide basic rate tax relief on up to £6,000 worth of childcare per child, which is much more advantageous than the existing scheme, which is paid per employee and only provides tax relief on £2,860. The scheme will be available for under-fives initially, then it will be phased in for under-12s and then all children up to 15 will be eligible.

“The new scheme is likely to work in a similar fashion to personal pension contributions,” notes Abbott. “The parents will put in 80% of the childcare costs, and the government the remaining 20%.”

Uncertainties over implementation

Pre-consultation thinking suggests that it is likely that the parents will pay 80% of the childcare costs directly to a voucher account , the remaining 20% of the costs being paid into the voucher account by the government.

“However, the mechanics have not been settled and the government and childcare industry have time to agree how the money moves around,” says Abbott. “The existing system is made as easy as possible via salary sacrifice and is managed by employers.

“It is important that a simple process is created for the new scheme, too, because if it is too complicated it may turn out to be a very valuable tax relief which won’t be used.”

Published: 04 July 2013

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