Tax-Free Childcare, universal credit and tax credits

Issue 244 (February 2015)

Mark Willis describes a new scheme due for introduction during 2015, aimed at assisting with childcare costs for some families, and its exclusive interaction with universal credit (UC) and tax credits. UPDATE: Tax-Free Childcare will not be introduced until 2017.

Tax-Free Childcare

The government is to introduce a new scheme for assisting with childcare costs, called Tax-Free Childcare. The provisions for Tax-Free Childcare are set out in the Childcare Payments Act 2014, which received Royal Assent in December. Draft regulations and guidance are already published, and the scheme is due to be implemented in autumn 2015.1 UPDATE: The government has announced the introduction of the scheme has been delayed until 'early 2017'.

The new scheme is not actually part of the tax system at all, and is essentially a new payment for families earning above a minimum threshold. The government will pay 20p for every 80p that the claimant pays into an online childcare account, which can only be used to pay for registered childcare costs. This is the equivalent of getting back the tax paid at the basic rate of 20 per cent. The maximum payable by the government is £2,000 a year per child up to 1 September after her/his 11th birthday (or 16th birthday if disabled), with no limit on the number of children that can be included. The minimum threshold will be based on a parent working eight hours a week at national minimum wage, meaning parents will qualify where they expect to earn at least £52 a week on average (but not more than £150,000 each per year).

Interaction with universal credit and tax credits

Under section 31 of the Childcare Payments Act, when a person applies for and is awarded Tax-Free Childcare, her/his UC award will be terminated. That means all of the UC, including amounts for adults, children and housing, not just the childcare element. Similarly, under section 30 of the Childcare Payments Act, when a person applies for and is awarded Tax-Free Childcare, her/his tax credits award will be terminated. Note that this means all payments of child tax credit (CTC) and working tax credit (WTC) will end, not just the childcare element. The guidance indicates a safeguard will be available by way of an online ‘childcare support questionnaire’ before applying, and there are provisions to withdraw or switch back if there is a change of circumstances.2 Information before applying for Tax-Free Childcare will state that it is not possible to get it at the same time as other government help with childcare.

In an official publication about UC and Tax-Free Childcare,3 the government says, ‘Whilst parents can only receive support from one scheme at any time, where families are eligible for both they will have the freedom to choose the scheme which best meets their needs’. An indication that it is only better-off families who will be well advised to switch from UC is in the statement that, ‘the introduction of Tax-Free Childcare will give parents confidence that, as they increase their income, they will continue to receive Government support towards their childcare costs.’ An example illustrates a case study where a full-time worker on Tax-Free Childcare has a reduction in his work to eight hours a week, and would be ‘better off’ on UC.

Comment

Claimants need to be aware that moving to Tax-Free Childcare will result in the termination of the whole of their UC or tax credit award – ie, the loss of all their existing subsistence benefit help. It may be less likely that the scheme will tempt someone already getting UC, which includes help with childcare for any hours worked at 70 per cent of costs covered (85 per cent from April 2016).

However, of particular concern here are working people on low incomes in receipt of tax credits, working under 16 hours a week as a lone parent or under 24 hours a week as a couple, or a couple working more than 24 hours where both are in work but one less than 16 hours. They cannot get help with childcare in WTC and in most cases do not at the moment have the option of transferring to UC. Applying for Tax-Free Childcare may seem like a good option as it is a way of accessing help with childcare costs , but the most they could gain is £2,000 a year per child (although it is unlikely to be this high as this would mean total childcare costs of £10,000 a year). They would lose up to £2,780 a year in CTC per child, plus the family element, any other WTC elements and passported help like free school lunches. It will be possible to withdraw from the scheme and re-claim tax credits, but in practice this is likely to cause a lot of hassle and delay, and they still will not get any help with childcare costs.

Advisers will need to be prepared to warn low-income families of the risks of claiming Tax-Free Childcare, and may also need to advise the relatively thin strata of families getting a small amount of tax credits or UC, who might actually be better off with Tax-Free Childcare. A better-off calculation will require an accurate prediction of the amount of tax credits or UC the claimant is likely to get, to compare with the 20 per cent of her/his childcare costs available through Tax-Free Childcare. Claimants with fluctuating incomes or variable childcare costs will also need to keep their position under review, bearing in mind that Tax-Free Childcare is to be reconfirmed each quarter, while tax credits are assessed on annual income, and UC uses monthly assessment periods.

 


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