Contractor Childcare Vouchers vs Tax-Free Childcare

It’s not easy balancing contracting work with childcare. You can either cut back on work by looking after your children or lose some of your earnings paying out for childcare.

Childcare vouchers offer a practical solution, giving people tax relief on the money they put towards childcare. However, from October 2018, they will no longer be available to new applicants. Instead, people can claim through the Tax-Free Childcare scheme.

So, how does it all work? Can contractors claim? And what is the best option for you? Read on for Umbrella Broker’s guide to contractor childcare vouchers and tax-free childcare.

What are childcare vouchers?

The Childcare Voucher scheme allows employees to take some of their wages as childcare vouchers, rather than money directly into their bank account. Why? By doing so, this part of their wage is exempt from tax and national insurance.

Employees can take up to £55 a week of their wages as childcare vouchers. This can be used to pay for approved childcare costs, including:

  • Registered childminders, nurseries or clubs
  • Childminders through an Ofsted-registered agency
  • A registered school
  • A care worker through a registered home care agency

Depending on the specific scheme, these vouchers may also be used on childcare assistance provided by your employer – such as an on-site staff nursery. Needless to say, these vouchers can only be used for your own child or stepchild who lives with you.

£55 per week amounts to £243 a month and over £2,800 over the course of a year. Considering exemptions for both tax (20%) and national insurance (13.8%), that provides a net benefit of over £1,000 for basic rate tax payers.

The amount you can claim is reduced slightly for higher and additional rate taxpayers:

  • Higher rate: £28 per week, £124 per month and £1484 per year
  • Additional rate: £22 per week, £97 per month and £1166 per year

Contractor childcare vouchers

Because they’re not classed as an employee, self-employed contractors cannot claim childcare vouchers. There are ways for contractors to get the benefits of tax-free childcare vouchers, however. Firstly, through their own limited company. Contractors operating as a limited company can pay childcare providers directly, which will reduce their corporation tax bill.

However, the easiest way is through a contracting umbrella. Because they add contractors as an employee, you can access the benefits of childcare vouchers with no extra admin on your part. The value of childcare vouchers is simply subtracted from your wage before it’s processed through pay-as-you-earn tax.

Things are changing

From 4th October 2018, new applicants can no longer join childcare voucher schemes. People already enrolled on a childcare vouchers scheme can continue to use it as long as they stay with the same employer and the employer continues to run the scheme.

Instead of childcare vouchers, new applications will need to go through Tax-Free Childcare to gain tax exemption on some childcare costs. Tax-Free Childcare works by reducing the cost of childcare to 80%. The government pays £2 for every £8 you pay towards childcare.

Essentially, for £300 worth of nursery costs, you would pay £240 and the government would contribute the remaining £60. So, the childcare costs are effectively tax-free for parents. This is available to the value of £500 every three months, per child.

Who is eligible for Tax-Free Childcare?

Tax-Free Childcare is meant to reduce the financial burden of childcare for working parents. It covers all the same registered childcare services as childcare vouchers but is only available for children aged 11 or under – or 16 and under with a disability.

You’re eligible if you and your partner (if you have one) are in work and earning at least the minimum wage for 16 hours a week or more. However, you won’t be eligible if either you or your partner has a taxable income over £100,000.

The main benefit with Tax-Free Childcare is that self-employed workers can use the system. Rather than employers deducting costs before processing wages, the childcare costs are processed through an online account, where the government contributes their 20% of the cost.

Comparing the two

As mentioned, existing users of childcare vouchers can continue to use them as long as their employer continues to use the scheme. However, once they start using Tax-Free Childcare, their childcare vouchers will be stopped. So, which is better for you?

Because childcare vouchers make your earnings exempt from both tax and national insurance – rather than just redeeming the tax value like Tax-Free Childcare – they are the best option for most parents. However, the limits on how much you can spend using childcare vouchers makes them unsuitable for parents with several children.

Tax-Free Childcare is the better option for any single parents spending over £4,650 on registered childcare or working couples spending over £9,300.

30 hours free

Another government scheme that goes hand in hand with Tax-Free Childcare is 30 Hours Free Childcare. This does what it says on the tin – gives 30 hours of free childcare to parents who are eligible. Fortunately, the eligibility criteria are the same as for the Tax-Free Childcare scheme.

While all parents get 15 hours of free childcare for 3-4-year-old pre-school children, this scheme provides double that to those who are working over 16 hours a week.

Make contracting easier

Childcare is just one of the many considerations for contractors. On top of that, you have invoicing, tax and expenses to worry about, along with your actual work. Umbrella companies make things easier, processing your income and paying you a simple net sum each month

Umbrella Broker can help you find the right umbrella company. Our online comparison tool helps you compare different providers in a matter of minutes. Any questions? Contact our team who will be happy to assist.