Childcare can be expensive – sometimes it can feel like you’re working simply to pay for that alone. The good news is, even as a contractor or consultant, if you pay for childcare, you could be saving thousands each year by signing up to a Government scheme.
May contractors and consultants are unaware that they could be benefiting from either the Childcare Voucher Scheme or the Tax-Free Childcare Scheme shortly set to replace it. These schemes aren’t widely publicised or understood, and are often wrongly written off as permanent employee benefits. Many are surprised to know that any contractor, consultant or freelancer employed by their own limited company can qualify and take advantage of the valuable tax breaks offered.
So, here’s a quick guide to making the most of the schemes.
Childcare Vouchers for contractors and consultants
Childcare Vouchers are one of the schemes currently provided by the Government to help out with approved childcare costs. The scheme operates through employers and allows you to pay towards your childcare from your pre-tax salary. Contractors and freelancers with children under 16 can save themselves a significant amount of tax and National Insurance contributions by running the scheme through their own limited company.
Once you’re a part of the scheme and so long as you satisfy HMRC’s eligibility criteria, you can claim up to a value of £55 per week (£243 per month). This allowance is per parent and does not depend on the number of children in the household. So, two working parents could qualify for £486 per month in tax-free childcare.
Limited company owners can register for the childcare voucher scheme through HMRC, or use a third party provider who will complete the admin for you. Once set up, the payment goes straight from your salary to your childcare provider each month.
This scheme will be closing to new applicants soon; it was due to close in April but the deadline has since been extended until 5th October 2018. So, if you’re thinking of opting in be sure to get signed up before it’s gone.
Eligibility for childcare vouchers
The vast majority of working parents are able to sign up to the Childcare Voucher Scheme. The only limitations are that your child has to be under the age of 15, you should receive your salary through PAYE and the payments must be made to a registered/approved childcare provider, from your Business Bank Account.
Childcare Vouchers are being phased out and replaced with the new Tax-Free Childcare Scheme. By opening an online account parents will receive a tax-free Government top-up towards their childcare costs. Under the new service, for every £8 you put into the scheme, the government will pay £2 to your approved childcare provider. The scheme is capped at £500 for every three months for each child (that’s £2,000 a year per child).
Eligibility for tax-free childcare
If you’re a working parent with a child under the age of 11, you could be eligible for tax-free childcare. If you’re a single parent, you must earn (or expect to earn on average) over £125 per week. As a couple, both you and your partner need to be earning/expecting to earn over £125 per week. If either of your earnings exceed £100,000 per year, you won’t be eligible for the scheme. If you or your partner are unable to work due to a disability, caring responsibilities or maternity, paternity or adoption leave, you could still be eligible.
So, what’s the best option for me?
Simply put, Childcare Vouchers are typically best for:
– couples where one parent doesn’t work
– those who earn over £100,000+ per year
– families with fewer children and lower childcare costs; you will make more savings with the childcare vouchers scheme over tax-free childcare if you are:
– a basic-rate taxpayer with yearly childcare costs of under £9,336
– a higher-rate taxpayer with yearly childcare costs of £6,252 or less
Tax-Free Childcare is typically best for:
– anyone who doesn’t receive a salary through PAYE, such as sole traders
– families with more children and higher childcare costs, as the help available increases with the number of children
Remember, if you sign up for Tax-Free Childcare, you won’t be able to later opt into the childcare voucher system.
Start making savings
Many freelancers and contractors could be making significant savings by making the most of the government schemes to help with childcare costs. If you have decided that Childcare Vouchers are best for you and are not already signed up, you need to act before 5th October or you’ll miss out. Or, if you are best suited to Tax-Free Childcare then the Government has set up a new website called Childcare Choices where you can sign up in as little as fifteen minutes.