Nearly £3 billion worth of childcare support money is going unused. Despite thousands of families being eligible for tax-free childcare support, not even a third are making use of it.
Here’s what your clients need to know about this scheme and how you can help them navigate this complex area.
Tax-free childcare was introduced in 2018, replacing the previous childcare vouchers that could be redeemed through employers.
But, despite promises of simplifying the system and getting support to the families facing high childcare costs, only around 300,000 parents made use of the scheme last year, despite over a million being eligible for the scheme.
The scheme works by topping up an account owned by parents for childcare costs.
For every £8 a parent pays in, the government pays an additional £2. Over a year, the government will pay a maximum of £2,000 per child up to an annual family limit of £10,000. This will continue until a child is 11, or 17 if they are disabled.
Despite the very tangible benefits this scheme could bring, however, £2.3 billion of funds that were set aside for the scheme four years ago have not been used.
Campaigners argue that the overly complex scheme is what is driving parents away.
Parts of the UK childcare support system aren’t joined up, meaning that while parents could apply for tax-free childcare, they might be better off recouping some of their costs via Universal Credit.
In both cases, applications for up to 30 days of free childcare must be done separately, with regional variations existing between the nations of the UK.
Tax-free childcare and Universal Credit support are both ways of getting support with the cost of childcare in the UK – the third most expensive childcare system in the world - but the benefits will be felt differently by families depending on their circumstances. For example, in many cases it is better for parents to claim childcare support through Universal Credit than it is through tax-free childcare, as you are able to reclaim 85p for every £1 of childcare spent. For tax-free childcare, the government will only add a further 20p to every 80p spent, meaning that in many cases parents will be better off with Universal Credit.
However, every circumstance is different and there is no right or wrong way. Conditions such as whether parents are on maternity leave, are receiving income and benefit support and their partner’s situation can all change the picture.
The best way to get to the heart of your client’s needs is to understand their situation. Start by asking how old your client’s children are.
When it comes to Universal Credit, many parents can claim additional Universal Credit for children up to the age of 16, and potentially 19. Tax-free childcare is only eligible for children up to the age of 11, or 17 in certain circumstances.
In both cases, parents will need to pay for some childcare. But if your client’s children are three or four, they may already be entitled to up to 30 hours free childcare a week, depending on where they live.
In England, parents are automatically eligible for 15 hours of free childcare a week, and can qualify for 30 hours a week if both parents earn below £100,000. This can be used over 38 weeks of the year.
In Northern Ireland, funded pre-school education places are offered instead of certain hours a week, to be redeemed over 38 weeks.
Scotland offers 16 hours of free childcare a week, with the opportunity for more.
Wales offers between 10 and up to 30 hours a week in certain areas.
It’s possible that your clients might not even need to pay at all.
Am I better off with Universal Credit or tax-free childcare? Your clients will need to know whether it is better for them to apply for Universal Credit or tax-free childcare, and while it will vary depending on the circumstances of your clients, you should understand the essentials of both schemes.
Should I switch from childcare vouchers to tax-free childcare? The vouchers scheme was closed to new applicants in 2018 as the vouchers were redeemed through employers. The tax-free programme is government only and can be broadly said to benefit families with more children and higher costs. On the other hand, not all employers will still offer vouchers, so even if it is beneficial for some parents to stay on the scheme, they may not be able to.
How can I apply for tax-free childcare? You will need to apply online, where you will be able to prove your eligibility for the scheme and create an account. For clients wishing to pursue the Universal Credit route, applications can be made online.
How long does it take for money to appear in the tax-free childcare account? As soon as the account is opened, you can start paying in money. The additional government money is typically paid in within a day.
Are you aware you are entitled to tax-free childcare support? Over 1.3 million families are eligible for this support, but with uptake so low, many families are simply unaware of the existence or their own eligibility for this scheme
Have you considered applying for this programme? Applying for childcare is complex and can often appear too confusing. Be ready to help audit your clients’ financial situations and be ready to make recommendations for how best to access childcare support from the government.
Are you currently receiving any working benefits? Your clients can still apply for tax-free childcare even if they are self-employed, are on sick, annual or maternity leave, or receive income benefit support.
These questions will help raise the issue of finding the right financial pathway to beneficial childcare support.
Planning for the future and raising children can prove to be financially tricky if your clients don’t take on the right advice. As a trusted financial adviser, you can help families through this difficult period by offering the right guidance and expertise.
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