The UK Government has published their response to the consultation on how the Tax Free Childcare scheme would work. What will this mean to employers of nannies and to nannies themselves?
The scheme will be administered by NS&I. So will this mean that nannies will need to register with NS&I in some way, or will NS&I use existing data held by regulators (such as Ofsted in England)? At this stage it is unknown but personally I feel it will mean that nannies and parents will need to register with NS&I, so that payments can be made.
Child benefit number for each child will be used to confirm eligibility. Parents who do not intend to claim Child Benefit will be required to send in their child’s birth certificate. I would wonder how long a delay would be the result of having to send in such an important document.
Who Qualifies for Tax Free Childcare?
All parents in the household must meet a minimum income level. This is National Minimum Wage x 8 hours.
Parents on statutory parental leave and couples where one parents is in work and the other is in receipt of credits-only Employment and Support Allowance or Carer’s Allowance, or contributory Employment Support Allowance.
From Autumn 2015, all children up to age five and disabled children under the age of 17.
It will then be rolled out to include children between 5 and 12 years old. Details of the roll out have yet to be announced, though should by complete by Autumn 2016.
This means that if you have a child aged 9 now (March 2014), then they may be eligible at some point between September-Dec 2016, by which time they will be age 11 and could be very nearly age 12. Eligibility will end the first week of September following the child’s 11th birthday.
Tax Free Childcare claims must be made by an individual so in a two parent household parents can choose who applies. I wonder if it makes a difference who applies?
Employment status and income of each member of the couple will be looked at. A couple need not be married, it is about if someone lives with someone else.
The child or children do not need to be biological, the scheme will include adoptive parents, extended family members and others who are responsible for raising a child. The child needs to live at the same address.
Upper income limit will be set, so if either parents reaches that limit then they will not be eligible. It is expected to be set at the same point as becoming an additional rate taxpayer.
Tax Free Childcare will only be able to be used to pay for childcare that enables parents to work. How exactly that will be checked is unknown at this stage.
Parents will need to be in paid work, which will include self employment as well as those on a salary. It is also intended to be claimable by parents entering paid work, though being offered to those whose paid work starts within 7 days of claiming.
Self employed parents will need to confirm that their profit (total receipts less expenditure) meet the minimum income level, each quarter (every 3 months). There will be a ‘start up period’ of around 12 months, where the minimum income level does not need to be met, for those starting a new business. Self employed parents can have one start-up period every five years.
Those parents who get other Government childcare schemes, such as Childcare Grant, will not be eligible.
It will also not be available for parents claiming Tax Credits or Universal Credit.
Like the existing Childcare Voucher scheme, Tax Free Childcare will require that the childcare provider is registered or approved. In England it is therefore necessary for a nanny to be registered with Ofsted on the Childcare Register, in Scotland you need to recruit a nanny via a registered agency and in Wales the nanny needs to be on the approval scheme.
When calculating the cost of childcare, employers of nannies can use it to pay the gross costs of employment. This is not detailed any further, so what that means I feel is unclear… does it include Employers NI, payroll admin, what about activity costs, mileage payments? I expect it will include Employers NI and possibly Payroll Admin, though not the other costs. I also expect that records of payments for services like payroll admin will need to be kept as evidence that the cost is totally due to employing a nanny and not for any other purpose.
What is the effect on the Childcare Voucher scheme?
Childcare voucher scheme will be closed to new applications.
Parents already in the scheme will continue in the scheme as long as they work for their current employer and that their employer continues to offer the scheme.
To be eligible for Tax Free Childcare, parents must not be in receipt of Employer-Supported Childcare, so I take this to mean that you can not be in the Childcare Voucher Scheme and the Tax Free Childcare scheme at the same time.
Depending on when you joined the voucher scheme and the number of eligible children you have, plus what your childcare costs are, you may be better off remaining in the scheme.
Childcare Vouchers are a salary sacrifice scheme. Leaving the scheme will therefore increase your salary. That can therefore change your entitlement to other things, such as child benefit.
How much is Tax Free Childcare worth?
Tax Free Childcare will provide 20% of childcare costs, up to a limit of £2,000 for each child. A family with 3 children could therefore get up to £6,000 though to get the full £6,000 their childcare cost would need to be £30,000.
How will this change how nannies are paid?
Payment from the parents account at NS&I will be made direct to the childcare provider. The parents will need to do something to action a payment. Parents will pay money into the Childcare Account, HMRC will top that up and then it is paid to the childcare provider. I can not see any timescale being mentioned as to how long that process takes, with Faster Bank Payments it should be almost instant but would NS&I hold on to the money for a period of time? Will the payment systems run 24/7 or process in batches? How long will the 20% topup from HMRC take to enter the Childcare Account following the parents paying into it? The Government response document says “quick and efficient” it does not say “instantly” or similar wording. So some delay is to be expected though it may only be a few hours.
Parents will be able to set up regular payments, though given changes in tax deductions this may not be that useful to parents employing a nanny, as each month’s payroll may be a slightly different figure.
If you have multiple children and some of them are eligible for the Tax Free Childcare scheme and say one of them is not, then how do you know how much of a nannies salary can be paid via the Tax Free Childcare scheme? The Tax Free Childcare account can not be used to pay for a non-qualifying child’s childcare cost.
The scheme is designed to work with childcare costs based on per-child. A nanny is paid per family, not per child – will that need to change?
The Tax Free Childcare scheme needs to go through a legislatory process before it becomes law.
There will be a general election before the scheme commences. Will whomever is elected still support the scheme? If not, will it be too late to stop by that time, would it be phased out?
While the Tax Free Childcare scheme looks good, time will tell if it is better than the existing Childcare Voucher scheme, or if parents already in that scheme will stay in it. Certainly those parents who are in the voucher scheme and get some child benefit will need to look at how a change in their salary will affect how much child benefit they get.
For nannies and parents there may be a need to restructure how nannies are paid. The new scheme does not seem to mention about what happens if a family have some children eligible but others whom are not, yet all the children are cared for by the same childcare provider. Whilst this may not apply to that many families, I suspect it will apply to those parents who currently have a child aged 9 or over and will affect parents as their currently young children get older. Childcare is not automatically no longer needed when a child reaches the September following their 11th birthday, yet the new scheme will end at that point for that child. Nannies may well be caring for children aged under 11 as well those aged 11 or older.
Views expressed here are mine and you may or may not agree with them. Please do take a look at the consultation response documents to get a feel for the proposed scheme.