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Childcare Vouchers vs Tax Free Childcare from Autumn 2015 (for Freelancers)

Which is best for Ltd Company Directors – Childcare Vouchers or the new Tax Free Childcare Scheme?

 

The Government has announced plans to provide Tax Free Childcare from 2015.  Under the scheme childcare costs up to £10,000 per year become effectively ‘tax free’ as HMRC will contribute 20% of the cost.

They’ve published a good 10 Things Parents Should Know information sheet on this. And for a good Q&A about the new scheme please see this article written by Louisa Peacock for The Telegraph.

In response to this, existing Childcare Voucher scheme providers are arguing that for some people the voucher scheme may be more beneficial, as shown by this Busy Bees Infographic.

Under the existing vouchers scheme parents earning below the higher rate tax threshold can claim child care vouchers of up to £243 per month for their childcare.

These vouchers are tax and NICs free, and for those freelancing as Directors of their own Ltds the scheme can be set up as ‘Salary Plus’. This means that the monthly vouchers value is not a deduction from salary, it’s in addition to salary.

The company pays the Childcare Voucher Scheme Provider directly (and this cost to the company is an allowable cost for Corporation Tax), and it is not included in the individual’s personal income.

So that’s £2,916 per year of childcare costs paid for by the Ltd via the voucher scheme. And a saving of £583.20 on Corporation Tax due to the additional company expense.

 

So how does the new Tax Free Childcare scheme compare for Ltd Company Directors?

Under the new Government scheme if the same Director were to pay out from their dividends £243 in childcare costs, the government would top this up by £60.75 (so it’s as if the individual paid 80% of the cost and the government 20% of the cost). Which works out to £729 per year contributed by the government.

That’s an extra saving of £145.80 per year for that Director under the new Tax Free Childcare scheme when compared to the savings via the vouchers scheme.

And for a couple where both are either self employed or freelancing through their own Ltds, that doubles to £1,458 from the government. Compared to a maximum saving in Corporation Taxes of £1,166.40 if both were running Ltds.

And bear in mind that Childcare Voucher schemes also cost around £16 per month in admin fees (£192 per year).

 

So I should just wait for the new scheme to start in Autumn 2015 then?

No, I’d say if you’re already paying for childcare, or due to be in the near future, sign up for the Childcare Voucher Scheme now!

You can still save money between now and Autumn 2015 via the voucher scheme, then switch over to the new tax free childcare scheme when it launches in Autumn 2015.

Just make sure you get your scheme set up as ‘Salary Plus’.

 

How do I set up a Childcare Voucher scheme?

It’s really quick and easy to do! Get in touch with a voucher provider such as Busy Bees, and they will email you the form to complete to set up your company scheme.

From there you will be sent a login to an online account, and everything is done online from then on!

 

Is there anything else I should consider?

Yes.

Bear in mind the restrictions on who qualifies for the new Tax Free Childcare scheme. (e.g. in two person households both must be working).

Consider the pros and cons of both parents’ working arrangements. For instance the voucher scheme may continue to be more beneficial if one parent is employed by a bigger company and receiving vouchers as part of their salary.

Be aware that HMRC could always impose restrictions on Directors of their own Ltds regarding the salary/dividend split for renumeration in the future. If Directors were to be forced to take a higher proportion of renumeration as salary in future, it could be that the vouchers become more attractive…

 

If it does transpire that the vouchers are better will I be able to get them after the new scheme starts?

Yes, provided you have signed up for them before Autumn 2015 you will be able to continue using the voucher scheme until you no longer require childcare.

 

For any more information or if you are interested in the accountancy services offered by Melot Accounting for please contact me.

 

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