Working parents to get more help with childcare costs

Nearly 2million working parents will receive more help with childcare costs from next year, the government has announced.

On the eve of the Budget, the government has unveiled plans to offer a childcare tax break worth up to £2,000 per child, which will apply to all children under the age of 12 where both parents are working. According to new research from Post Office Life Insurance, half of parents with children under the age of 18 are currently reliant on two incomes to maintain their standard of living.

The Chancellor, George Osborne first announced this boost for working families a year ago, but the original scheme only offered help of up to £1,200 per child. It was also due to be phased in gradually so that it would take seven years for all children under 12 to be eligible to receive support, but will now cover all children under 12 within a year.

Here, we take a closer look at how the scheme will work, and whether you will be eligible.

Who will qualify?

Families where both parents are working and each earns at least just over an average of £50 a week, but not more than £150,000 a year, will qualify for the scheme. This includes parents who are self-employed, and those who are on maternity, paternity or adoption leave.

However, homes where only one parent works will not be eligible, which means stay-at-home mothers won’t benefit.

How will the new scheme work?

Parents who qualify for the scheme will be able to open an online voucher account. For every 80p they pay into this account towards childcare, the government will put in 20p.

This 20% rebate applies to the annual cost of childcare of up to £10,000 a year. So, for example, if you spend £4,000 on childcare a year, you will be entitled to £800 of tax-free support, and if you spend £6,000, you will be entitled to £1,200. It’s not only parents who can pay into the account, grandparents, other family members or employers can contribute if they want to.

The vouchers can be used to pay for any Ofsted-regulated childcare in England and equivalent childcare in Scotland, Wales and Northern Ireland. This can include child-minders, nannies, nurseries, play-schemes and school-based care.

If at any point you want to stop paying into the scheme, you will be able to withdraw any money you have built up, but the government will remove its contribution.

Will this replace the current childcare voucher scheme?

Under the employer-run existing childcare voucher scheme, you can pay for some or all of your monthly childcare costs out of your income before tax is deducted. Basic rate taxpayers can receive up to £55 per week or £243 a month of vouchers, exempt from tax and National Insurance, while higher rate tax payers who join the scheme now can only receive £28 per week (£124 per month) tax and NI exempt. Around 450,000 families are currently signed up to this scheme.

The new scheme won’t replace the current voucher system, but you won’t be able to belong to both the existing scheme and the new scheme at the same time. If you belong to the current scheme, you can transfer across to the new scheme provided you are eligible.

The existing childcare voucher scheme will remain available to anyone who wants to sign up before the new scheme comes into effect in autumn 2015, but after that it will be closed to new applicants.

Bear in mind that if you switch out of the existing scheme and into the new scheme, you won’t then be able to move back to the previous scheme.

What other financial help is available?

When your child reaches the age of three, they will be entitled to 15 hours of free nursery education for 38 weeks of the year, regardless of how much you earn. Your child is entitled to this until they reach compulsory school age the term after their fifth birthday.

Families where both parents each earn less than £50,000 are entitled to receive Child Benefit, which is £20.30 a week for the eldest child and £13.40 for other children. Households where at least one parent earns between £50,000 and £60,000 a year will be entitled to some Child Benefit, but not the full amount, but if one parent earns over £60,000 they won’t eligible.

If you have children eligible for Child benefit, you may also be eligible for tax credits to put towards childcare costs. Existing means-tested benefits such as Child Tax Credit and Working Tax Credit are gradually being replaced by a single Universal Credit. The new system, which involves monthly rather than weekly or fortnightly payments, has already been introduced in parts of Manchester and London, and this month (March2014) is being introduced in Bath, Harrogate, Rugby, and Flintshire, north Wales. It will eventually cover the whole UK.

To help more families move off of benefits and into employment, the government has said the state will pay for up to 85% of childcare costs under Universal Credit, up from 70% at present.  This will cover the bulk of the cost of childcare for around 300,000 families.

You can check your entitlement to tax credits by calling the tax credit helpline on 0345 300 3900.

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