The tax-free childcare voucher system can seem complicated, and because of the way it is usually administered through employers, it may seem like a scheme which is only applicable to those in traditional employment. However, a new scheme announced in the 2014 budget will come into operation in October 2015 when it will be extended to include self-employed individuals, including contractors.

How does the current childcare voucher scheme work?

Until the changes come into effect, the only way for a self employed individual to benefit from the tax-free childcare voucher system was if they were registered as a limited company. They would have to find a childcare provider and pay their bills through the company in order to qualify for tax relief on the sums involved and reduce the total amount of corporation tax due. The current system of employer-supported childcare will continue to run, and current users will be able to choose whether they wish to switch to the new scheme or not.

How will the new childcare voucher scheme work?

The scheme which will be coming into place in the autumn of 2015 will enable parents to purchase childcare vouchers which will allow them to pay for child care. For every 80 pence that a parent puts in, the government will contribute 20p, up to a limit of £10,000, meaning that a parent can benefit from £10,000 worth of childcare for a cost to them of £8,000 with a £2,000 subsidy.

This childcare can be used for any children under the age of five initially, then rolled out to those aged up to twelve, with an extension for children with disabilities who will be supported until the age of seventeen. The scheme will operate under a system of quarterly entitlement whereby applicants will have to prove that they qualify for support every three months by confirming their details and ongoing status. This means that there will be no need for parents to notify HMRC of any changes in their circumstances as and when they occur, as is necessary for tax credits. Any alterations to a person’s status can be updated during their quarterly entitlement update.

Who will qualify for this scheme?

The scheme is designed to support working parents who pay for childcare, although not every working parent will qualify. For example, if both parents live in a household, then both will have to work in order to qualify for the tax-free voucher scheme, although a parent on parental leave will be considered ‘in work’ (including maternity leave, paternity leave and adoption leave) and those in receipt of certain benefits will still qualify.

The minimum amount you will need to earn is just over £50 per week on average, and you can claim this benefit until you reach the upper threshold of £150,000. However, in order to encourage parents who work for themselves to use the scheme, the £50 weekly minimum will be waived for those who are registered as self-employed.

How will the process work?

The goal of the scheme is to provide a simple and easy way for parents to access the funding, so it has been designed to make it as easy as possible to use. There is a single point where parents can register to join the scheme, make payments into their accounts and make the necessary arrangements for their childcare provider to be paid. They will be able to see the details of all their children’s accounts in the same place and

One of the most accommodating features of the new scheme is that it is much more flexible than its predecessor. Users can pay in as much as they want whenever they want, meaning that they can top up their account with additional funds to be used in times when they are likely to use more childcare such as the summer holidays. It doesn't even have to be a parent who pays in – if the household qualifies then anyone can add to the fund, including grandparents, employers or any other party who wants to contribute to childcare costs.

Users can also withdraw funds if they need to, whether that’s because you no longer use childcare or your financial circumstances change and you want to free up some of your funds. This means that you can take out some of the capital from your account and the government will withdraw their corresponding contribution. Parents will be able to access the scheme for free as there will be no fees involved in the administration of the accounts.

For many people, childcare is one of the biggest household outgoings, so being able to access tax free assistance with the bills is a real bonus. Your accountant will be able to offer you further advice on how you can utilise other tax efficiencies as a self-employed individual, contractor or director of your own limited company.

For more information on claiming childcare vouchers as a contractor, please call our new business team on 01253 362062 or email jacqui.fairbrother@nixonwilliams.com.