Do you know that childcare vouchers are being replaced with a ‘Tax-Free Childcare Account’? Financial Planner, and Essex Baby blogger, David Vaughan, is on hand to explain the ins and outs of this new scheme.

In March the Government announced further details of a new scheme to help parents with the cost of childcare. In this month’s blog I explain how the new system will work.

What is changing?

From autumn 2015 Childcare Vouchers will be replaced with a ‘Tax-Free Childcare Account’. The government will pay 20p for each £1 of childcare cost incurred by parents up to certain limits. If you already receive Childcare Vouchers you can continue to do so if you wish.

How will tax-free childcare work?

Parents will open an online account through the government’s website (gov.uk). They can pay into this account (up to £8,000 per child) and for each 80p paid in, the government will add 20p. Grandparents, family or employers could also choose to pay into the account if they wish. This money is then used to pay for childcare through a registered provider.

Who is eligible?

To qualify, parents will have to be in work, earning just over an average of £50 a week and not more than £150,000 per year. Up to £2,000 of government help can be claimed per child on childcare costs of up to £10,000 per year. The scheme will be available for children up to the age of 12 (or 17 with disabilities).

Do the self-employed qualify?

Yes. Unlike Childcare Vouchers, Tax-Free Childcare can be claimed by those parents who are self-employed.

Can I build up a balance in the account?

Yes. You can build up a balance to help with childcare costs when required (e.g. the summer holidays).

What if my situation changes?

If you no longer need childcare you can withdraw your money from the account. However a deduction will be made in respect to the 20p in the £1 that was added by the government.

What about Childcare Vouchers?

If you already receive Childcare Vouchers, or apply before next year, you can continue to receive them if you wish. Whether vouchers or a tax-free childcare account is best will depend on your family’s situation. Childcare Vouchers allow savings on National Insurance as well as Income Tax, whereas Tax-Free Childcare could result in higher savings, particularly if you spend a lot of money on childcare, have a larger family, are self-employed or if your employer does not offer Childcare Vouchers.