The Government is bringing in a new childcare scheme which is designed to support working families’ childcare costs. As experts within the contractor industry, ICS Accounting have detailed what the new Tax-Free Childcare (TFC) includes and the impact it will have on the contracting industry.
The TFC will eventually replace the childcare vouchers and directly contracted childcare provided by employers under the Employer Supported Childcare (ESC) scheme.
How contractors can currently claim childcare relief
Currently there are three ways that you can claim relief for childcare costs:
- Childcare Vouchers – An employer (your PSC) can provide its employees (you and any other paid directors) with childcare vouchers of up to a maximum £2,915 per annum, assuming they earn at least national minimum wage. The vouchers can be used for children up to the age of 15
- Directly Contracted Childcare – An employer can pay for childcare, up to a maximum of £2,915 per annum, for their employees directly (typically by entering into a contract with a childcare provider which must be appropriately registered) and paying for childcare on the employee’s behalf. This scheme can be used for children up to the age of 15.
- Tax-Free Childcare – For eligible working families (both parents must be working), TFC offers to cover 20% of childcare costs, up to a maximum value of £2,000 per child per year, for children under the age of 12. The scheme operates through online childcare accounts. There is a maximum earnings limit of £100,000 for TFC.
The difference between ESC & TFC
There is a key difference between ESC and TFC because the £2,915 limit for ESC is per parent. If you and your spouse are paid through your PSC then this could double to £5,830. However, the TFC limit is per child which means that if you only have one child then the comparison is £5,830 (with two parents working through PSC) for ESC but only £2,000 through TFC.
The difference between TFC & Directly Contracted Childcare
Another important variance is that where you have a PSC, directly contracted childcare or vouchers of £2,915/£5,830 will be paid through your company and attract corporation tax relief. However, the TFC will have to be paid personally so there are no corporation tax savings. Dividend tax will fall due on any additional funds extracted from the PSC to pay for childcare costs above £2,000/£2,915/£5,830.
The difference between TFC & Directly Contracted Childcare
A comparison of the schemes for a contractor operating through a PSC are set out below.
This is based on the assumption that the contractor’s family has childcare costs of £1,000 per calendar month which are paid for with funds from the PSC and they pay higher rate tax on their dividends at 32.5%.
| ESC | ESC | ||||
| Tax-Free Childcare | One Parent (paid director) | Two Parents (paid directors) | |||
| A | Childcare Costs per Annum | 12,000 | 12,000 | 12,000 | |
| B | Tax top-up (20%)/directly contracted limit (£243pm) | -2,000 | -2,915 | -5,830 | |
| C | Tax Saving of payment through PSC | B x 19% | – | -554 | -1,108 |
| D | Cost to draw down dividends (assume higher rate) | A+B x 32.5% | 3,250 | 2,953 | 2,005 |
| Net Annual Cost | A + B + C/D | 13,250 | 11,484 | 7,068 |
Parents cannot simultaneously receive support from both ESC and TFC. Parents who wish to remain in ESC will be able to, whilst they work for the same employer and that employer continues to offer it. However, ESC will be closed to new applicants from 4 October 2018. This is something to keep in mind if you close your PSC to undertake a permanent role, but later return to contracting through a PSC.
Important changes to Childcare Options from October 2018
From 5 October 2018, if you aren’t already partaking in childcare vouchers or directly contracted childcare then your only option will be the TFC scheme. If you are already paying for childcare you will need to look at the most beneficial method for your family before your only choice is TFC.
How to qualify for ESC or TFC
There are various criteria that you need to meet in order to use either ESC or TFC, a summary of the key areas are included in this table.
| ESC | TFC | |
| Earnings Eligibility | Above minimum wage | Average above £120 pw but less than £100,000 p.a |
| The age limit for children | 15 years | 12 years (17 years if disabled) |
| Can both parents claim if separated? | Yes | No |
| Claimed alongside Child Tax Credits? | Yes | No |
| Do both parents have to work to claim? | No | Yes |
ICS Accounting are expert accountants with extensive experience within the contractor market. For more information on childcare schemes, as well as any accounting or taxation matters, please contact our New Business team on newbusiness@icsuk.com or call 0800 195 3750.
