Contractors and other self-employed workers will be able to take advantage of the tax-free childcare voucher from October 2015. Being that this voucher has previously been unavailable to a majority of the self-employed, you may not know anything about it. We have put together this complete guide as a means of explaining the scheme and how it applies to freelancers and contractors. We encourage you read this guide; it should answer most of the questions you have about the voucher. If you and your business qualify, the tax-free childcare voucher could end up being of significant benefit to you.
Chancellor George Osborne's 2014 budget statement included news that the law regarding the tax-free childcare voucher system would be updated from October 2015. What used to be available to workers only through their employers will be extended to the self-employed later this year, benefiting contractors and freelancers everywhere.
Under the old system, self-employed individuals could only take advantage of the tax-free childcare voucher if they were directors of limited companies. The limited company would have to retain the childcare provider and pay for the services directly from the company bank account. Doing so would reduce taxable income and the payable amount of corporation tax. Self-employed individuals taking advantage of the tax-free childcare voucher system under the old guidelines may continue to do so, or they can switch to the new scheme.
Under the new plan, self-employed parents will be able to directly purchase vouchers to pay for childcare. The ratio is 80/20. In other words, the government will contribute 20p for every 80p the parents spend on vouchers – up to a limit of £10,000. Parents can effectively get £10,000 worth of childcare at a 20% discount when you factor in the government's contribution.
The new tax-free childcare voucher will initially apply to children age five or younger. Eventually, the government will allow children up to age 12, and then expand the programme further to children with disabilities up to age 17. The new scheme effective from October 2015 will require participants to prove eligibility every quarter. Any changes that would alter parents' participation in the scheme need only be reported at the start of the next quarter after said changes.
In addition to qualifying children, parents must also meet a certain set of criteria in order to be eligible for the voucher scheme. The scheme is intended to benefit working parents who, because of their work status, cannot provide appropriate childcare. Eligibility requires the following:
The government has expanded the tax-free childcare voucher to the self-employed in order to give them some of the same benefits afforded salaried workers. To that end, all participants in the new scheme will register for the programme, purchase their vouchers, and make arrangements with childcare providers in one central location. Parents, grandparents, or anyone else who wants to contribute to childcare can pay into an account at any time, and in any amount.
Flexibility and ease-of-use are the two hallmarks of the new tax-free childcare voucher scheme. There will be no fees attached to account maintenance, and parents will be able to make changes according to the dictates of their circumstances. For example, you could pay into the system to cover childcare for an entire year, only to withdraw funds in the event your child no longer needs care halfway through the year.
Your accountant at ICP can advise you about taking advantage of the tax-free childcare voucher through your limited company, or as a contractor or freelancer. We know how the system works and how it can be used to your advantage. We encourage you to take a look at the scheme – it could save you quite a bit of money on childcare. It could mean the difference between continuing to enjoy the benefits of self-employment as compared to returning to work as a salaried employee.