Tax free childcare vs childcare vouchers

toph

Hello,

i'm trying to decide weather to utilise childcare vouchers or tax free childcare scheme. the calculators and examples on the mse articles are contradictory making clouding my judgement here.

moneysavingexpert.com/family/childcare-vouchers
moneysavingexpert.com/family/tax-free-childcare

all show different suggestions for our circumstances

i'm a higher rate tax payer and she is basic rate, childcare is ~£550 per month.

the rules state i can get £28 per month of vouchers but can save a max of £624 per year which is the amount of tax i would have paid on the £28 per week.
childcarevouchers.co.uk/hmrc-calculator#.WO06tP2-LMU

childcare = £6600 per annum

tax free childcare = £6600 - 20% (1320)= £5280
vouchers = £6600 - tax saved (£624) = £5976

it looks to me like i'm significantly better off (£696) with tax free childcare scheme vs vouchers yet the graphic and examples on the mse pages listed above show i'd be better off with vouchers.

it would help if the calculators showed their workings out to make it clear how vouchers savings is worked out but i believe my sums are accurate.
This page has the clearest detail of voucher savings.
childcarevouchers.co.uk/hmrc-calculator#.WO06tP2-LMU

Anyone gone through this and confident they are saving either way?

Thanks

rpc

So you don't have grandfathered rights to higher rate relief?

And your wife does not/cannot claim vouchers?

And you don't claim child tax credits?

If all are true, then you will be better off under the new scheme.

A single higher rate taxpayer only saves £624 per year with vouchers. With the new scheme, you will save 20% or £1320. Nothing wrong with your maths.

If your wife could also take vouchers then your combined saving would be £624 + £933 = £1557 and then vouchers wins.

Another consideration could be that childcare vouchers can keep your income down for the child benefit charge, but tax free childcare doesn't.

toph

thought as much.

she's now decided to not go back to her main (financially) job so will most likely earn less than £11k through all employment this year.

tax free child care it is then.

for anyone else, both parents must earn at least on average £120 per week each (individually) over 3 months to qualify & the scheme must be re validated every 3 months to confirm compliance with the minimum earnings.

confusing stuff

girllikeme1

By how much are you over the higher rate tax mark? My husband salary sacrifices extra into his workplace pension in order to reduce his gross salary. He does this enough that he qualifies for childcare vouchers. Some calculations using an online salary calculator showed us that this had a negligible impact on his net income, due to the tax and NI savings; it's chucking extra money into his pension at the same time as making him eligible for the full £243 of childcare vouchers. Worth a try.

rpc

It doesn't have to be salary sacrifice, other payroll payments count.

But the earnings assessment is an annual activity and the boat should have been missed for the 17/18 tax year.

Buttonmoon2009

Just wanting to jump on to this thread by asking if there is confirmation on whether the £100k salary is associated with one persons salary or combined? I have read both the MSE article and the Gov.uk website and I am still a little unclear.


Thanks.

Bean83

It is based on the individual's salary, not combined (i.e., the same as for child benefit). So you could earn £99000 each and still qualify.

toph

girllikeme1 wrote: »

By how much are you over the higher rate tax mark? My husband salary sacrifices extra into his workplace pension in order to reduce his gross salary. He does this enough that he qualifies for childcare vouchers. Some calculations using an online salary calculator showed us that this had a negligible impact on his net income, due to the tax and NI savings; it's chucking extra money into his pension at the same time as making him eligible for the full £243 of childcare vouchers. Worth a try.

I had thought about reducing my salary through salary sacrifice, i think others at work have reduced their number of days worked etc to ensure they get the credits and child benefit.

looking into tax credits and child care vouchers again there are some nice tables that explains earnings thresholds
for tax credits
https://www.moneyadviceservice.org.uk/en/articles/child-tax-credit

for care vouchers
http://uk.benefits-rewards.sodexo.com/news/eligibility-changes-from-april-5-in-childcare-vouchers-entitlement

my base + bonus + bits is a bit more than the savings i'd make by dropping salary to the voucher threshold or indeed the tax credit threshold, but i'm sure the extra pension contributions would have been handy in the future.

http://www.childcarevouchers.co.uk/documents/ccv_whatshappening_2017.pdf

Final deadline for new entrants to Childcare Voucher schemes is set for April 2018. Your existing employer funded Childcare Voucher scheme will continue after this date for those who had joined the scheme prior to the deadline of April 2018. It will then be closed to any new joiners.

its not too late to get the vouchers if your work place offers them.

Rickster1978

Hoping some of you guys can give me some advice. I'm not sure if I'm better off with Childcare Vouchers or Tax Free Childcare.

My wife works 16 hours a week and falls below the tax band. Im a higher band tax payer so I'm only entitled to the lower level of childcare vouchers from my employer.

We have one daughter who we have to pay childcare for, the other is in school. Our annual childcare costs are £4,800 per annum.

I'm guessing that the new scheme may be better for me as my wife doesn't pay tax so can't make use of the voucher scheme.

Any advice would be most welcome.

toph

its a confusing tricky calculation

http://www.computersharevoucherservices.com/parents/pages/how-much-can-i-save.aspx

you'll get £28 per week in childcare vouchers = ~£112 per 4 week month or £1456 per year (52 weeks). the childcare voucher sites all claim you can save a max of £623. I really don't understand how they reach that value (i guess calculated as to how much tax you would have paid at 40% but that doesn't = £623 i make it £582.4), but taking that as gospel, under the new tax-free scheme you can get a upto £2k added on top of upto £8k of childcare spend per year.
In your case on £4800 childcare under the new scheme of pay £8 get £2 added you'll save ~ £960 vs £623 in childcare vouchers, so long as your wife earns at least £120 per week (averaged over 3 months) and you both earn less than £100k each.

in short you will be better off with the tax-free scheme by £337 per year.

my maths
you put in 8 they put in 2 = 25% gain
to total £4800 you need to put in (4800/125)*100 = £3840 and they add 25% = £960 to total £4800
in my case my care costs are ~ £6600, i put in (6600/125)*100 = £5280 and they add 25% = £1320 to total £6600

in your case, to take home £3840 after 40% tax you have to earn (3840/60)*100 = £6400
for me that is £8800

it would help if they made clear they where adding 25% but i suspect they worded it this way to avoid complaints of subsidising working parents, i guess the assumed complainers aren't great at maths (took me a while to get the right answers here)?

if you are not far into the 40% tax bracket it may be beneficial for you to do salary sacrifice into your pension or other payment to take your earnings below the threshold so you can get the £55 per week vouchers (saving £933) and / or even takeing your earnings down to qualify for child tax credits, £55k threshold in your case.
https://www.moneyadviceservice.org.uk/en/articles/child-tax-credit

You have until 2018 to decide if you want the vouchers or the new scheme.

the new scheme looks easier to pay into and manage, and i may be able to pay into it using a cashback credit card, also any one (family, friends) can pay in making it more flexible.

Rickster1978

Thanks Toph, that's really helpful. Thank you for taking the time to reply in such detail. It does look like it'll be tax free childcare for me.

I wonder if the higher figure they state for the voucher savings takes into account NI contributions as well. That may be the difference between the £582 you got and the £623 they quote.