Paying for Childcare: Childcare Vouchers or Tax-Free Childcare?

There are currently two schemes in operation that doctors can use to gain tax savings on childcare, and ultimately reduce the impact of childcare costs on their take home pay.  These are Childcare Vouchers and Tax-Free Childcare.  However, parents can only apply for one of the schemes so must choose between them.  In this article we outline the differences between the schemes and the circumstances they each favour.

Childcare Vouchers

Childcare Vouchers have been around for some time and it is intended that Tax-Free Childcare will replace them.  However, there has been a reprieve for Childcare Vouchers as the deadline to apply for the scheme has been extended to 4 October 2018 (it was planned to close on 5 April 2018).

Childcare Vouchers are offered by employers including the NHS and you buy them from your pre-tax income, meaning you effectively pay for childcare from your income before tax and National Insurance deductions.  Having bought the vouchers you can use them to pay for registered childcare for children under 16 (under 17 if disabled).  Doctors can save up to £933 a year in tax and National Insurance through the scheme.

Note although the scheme will be closing to new members in October, existing users can continue in the scheme beyond this date if their employer continues to offer it.

Tax-Free Childcare

Tax-Free Childcare is offered directly by the government rather than through your employer.  There are certain qualifying criteria, namely:

  • You, and any partner, must each expect to earn at least £125 a week (the equivalent to 16 hours’ work on minimum wage) but less than £100,000 a year

You open an online account to pay for registered childcare and for every £8 you put in, the government adds £2.  You can receive up to £2,000 per child per year (£4,000 if disabled).  The account can be used to pay for registered childcare for children under 12 (under 17 if disabled).  Note the lower age limit for non-disabled children compared with Childcare Vouchers.

Choosing between the two schemes

Some doctors will not qualify for Tax-Free Childcare, for instance if their or their partner’s income is over £100,000, if their partner does not work, or if their child/children are aged 12 or over.  In these circumstances the choice is removed, leaving only Childcare Vouchers as a possible tax-efficient way to pay for childcare.

For doctors who are eligible for both, Childcare Vouchers give the bigger saving but it’s possible to buy much more Tax-Free Childcare.  With Childcare Vouchers, having no tax and National Insurance to pay on childcare costs is equivalent to a 32% saving for basic rate taxpayers, 42% for higher rate or 47% for additional rate taxpayers.  By comparison, the Tax-Free Childcare scheme offers 20% off childcare costs.  However, you can gain up to £2,000 per child per year through Tax-Free Childcare compared with a maximum gain of £933 per child per year with Childcare Vouchers for a basic rate taxpayer, £624 for a higher rate or £590 for an additional rate taxpayer.

Childcare Vouchers may therefore be the best option for doctors with fewer children and lower childcare costs, whereas Tax-Free Childcare could be better for those with more children and higher childcare costs.

Remember the Childcare Vouchers deadline

If you decide Childcare Vouchers are your best option and you are not an existing user of the scheme please note the deadline of 4 October 2018 for new applications.

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