The Government has announced a new scheme for tax-free childcare for working families.
Once fully up and running, the tax-free childcare scheme will be worth up to £1,200 per child, and so will save a typical working family with two children under 12 up to £2,400 a year.
It will be phased in from autumn 2015 and will ultimately be open to around 2.5 million families with children under 12. From the first year of operation, all children under 5 will be eligible, initially opening the scheme to 1.3 million families, and the scheme will build up over time to include children under 12.
To be eligible, families will have all parents in work, with each earning less than £150,000 a year, and will not already receive support through tax credits and later, Universal Credit. They will receive 20% - equivalent to the basic rate of tax - of their yearly childcare costs up to £6,000 per child.
The new Tax-free Childcare scheme will massively extend support compared to the current system of Employer Supported Childcare (ESC). ESC will continue for current members if they want to stay in it, but new claimants will get support through the new tax free offer. ESC will also continue to be open to new joiners until the Tax-free Childcare scheme is available. Eligible ESC recipients may choose to move into the new Tax-free Childcare scheme if they wish, but will not be able to receive both. For a family with two children, the new offer will be worth more than double the amount of a single claim for ESC, and will be open to around five times as many families.
For parents who currently receive childcare support through tax credits and in due course Universal Credit, the Government will increase childcare support to improve work incentives and ensure that it is worthwhile to work up to full-time hours for low and middle income parents. An additional £200m of support will be provided within Universal Credit, which is equivalent to covering 85% of childcare costs for households qualifying for the Universal Credit childcare element where the lone parent or both earners in a couple pay income tax. The details of how to provide this support will be determined as part of the consultation on the scheme for parents not in receipt of Universal Credit, to ensure the two schemes operate effectively together.
The new tax free offer will be phased in from autumn 2015, partly funded by the phasing out of ESC. The £200m Universal Credit offer is planned to be phased in from April 2016 as childcare support moves from tax credits into Universal Credit and will be funded from within social security budgets at the time. Details will be set out in future spending reviews.
The Government will shortly consult on the detail of the new Tax-free Childcare scheme, including on how employers could continue to play a role in supporting their employees with childcare costs within the new system.
Prime Minister, David Cameron said:
If Britain is going to succeed in the global race we must help those who work hard and want to get on.
Too many families find paying for childcare tough and are often stopped from working the hours they’d like. That is why we are introducing tax free-childcare, saving a typical family with two children up to £2,400 a year.
This is a boost direct to the pockets of hard-working families in what will be one of the biggest measures ever introduced to help parents with childcare costs.
Deputy Prime Minister, Nick Clegg said:
I want to help every family to get on in life. Already we have created a million private sector jobs, put money back in people’s pockets by cutting income tax, and extended free childcare entitlements for pre-school children.
Delivering tax-free childcare is the next step to ensuring all families can work and get on. The rising cost of childcare is one of the biggest challenges parents face and it means many mums and dads simply can’t afford to work. This not only hurts them financially, but is bad for the economy too. This announcement of a £1bn investment in childcare will make sure it pays to work.
An extra £1,200 for each child will make a real difference to families who find themselves constantly worrying about how to juggle their family budget. And extending support for working families on Universal Credit will make sure it is worth working extra hours even if you’re on low wages.
Notes for Editors
- Details of the new scheme will be set out following consultation, but it is expected that under it parents will be able to open an online voucher account with a voucher provider and have their payments topped up by Government. For every 80p families pay in, the Government will put in 20p up to the annual limit on costs for each child. Parents will be able to use the vouchers for any Ofsted regulated childcare in England and the equivalent bodies in Scotland, Wales and Northern Ireland.
- Tax-Free Childcare replaces the existing system of Employer Supported Childcare, which is offered by less than 5% of employers and used by around 450,000 families. It provides an income tax and National Insurance contributions (NICs) exemption equivalent to relief at the basic rate for childcare vouchers and directly contracted childcare and will be closed to new entrants as the new scheme is introduced. Existing members of these schemes can choose to remain on their current scheme, and the tax exemption available for workplace nurseries will continue, where offered by employers.
- Through the childcare element of Working Tax Credit, households where each parent works 16 hours or more already receive support for 70 per cent of their childcare costs up to a weekly cap of £175 for one child or £300 for two or more.
- Today’s announcement builds on support already announced by the Government, including extending the free entitlement to provide 15 hours a week of free early education for all 3 and 4 year olds; extending 15 hours of free childcare a week to 40% of 2 year olds from 2014-15; and extending childcare support in Universal Credit to parents working fewer than 16 hours.
- At the same time, the Government is taking action to drive up the quality of childcare and give more flexibility to professionals: improving qualifications through introducing Early Years Teachers; reforming the Ofsted inspection framework for childcare providers; and reducing bureaucracy for providers. Alongside improving standards in the early years, this will help ensure that parents’ money goes further.
- On 29 January the Government published More Great Childcare which sets out how parents will have more choice of high quality childcare. Qualifications for the early years workforce will be more rigorous and demanding.
- The OECD suggests that the UK labour force could expand by 16% if the gap in working hours and labour force participation between men and women improved (OECD 2012). Mothers with children under 12 who want or are actively seeking a return to work have the potential to add over £4 billion per year to the economy.
- Department for Education survey data shows more than half of stay-at-home mothers would rather be in paid employment and nearly a quarter of employed mothers would increase their working hours if they could arrange good quality childcare which was convenient, reliable and affordable.