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Tax-Free Childcare for the self-employed

For years, the self-employed have drawn the short straw when it comes to getting help looking after kids. We’ve got good news though: in April 2017, the Government finally started rolling out a new Tax-Free Childcare scheme that actually benefits the self-employed.

What is the Tax-Free Childcare scheme?

Tax-Free Childcare is a new HMRC scheme that offers working families support towards childcare costs.

The scheme is available for children under 12, or under 17 if the child is registered disabled. Working parents living in the UK will qualify for the scheme, provided they’re earning at least £120 a week.

However, if you’re newly self-employed, you’ll benefit from the ‘start-up’ period of twelve months, in which you won’t be required to earn the minimum income level. A new start-up period will be available every five years.

How does the Tax-Free Childcare scheme work?

To cover the 20% VAT usually charged on top of services (hence the ‘Tax-Free’ in the name), the Government will top up every payment of 80p with an extra 20p up to the equivalent of £2,000 per tax year, per child.

For instance, a payment of £160 into the account would generate an extra £40.

The £2,000 isn’t all available at once – there’s a quarterly government contribution limit of £500.

For disabled children, the annual cap extends to £4,000.

Parents need to set up a Government Gateway account with HMRC, which they (or other family members) can then pay money into at any point. The account balance can be withdrawn and used for childcare whenever the account holder likes, as long as the provider is registered under this scheme (many thousands of providers have already signed up).

It’s worth noting that you can withdraw the money you’ve built up if you need to, but if you do, the Government’s contribution will be withdrawn. Also, the scheme can’t be used if you’re claiming Universal Credit.

Each account holder must reconfirm Tax-Free Childcare eligibility every three months. All you need do is tick a box saying your circumstances haven’t changed – you’ll be sent reminder several weeks in advance.

The childcare provider must be registered with a regulator such as Ofsted.

How can I apply for Tax-Free Childcare?

You can apply for the scheme on the government website Childcare Choices, where you are able to setup an online account, which is maintained by one parent only. This operates like an online savings account with the ability to either pay more or less into it depending on how much childcare you’ll need, especially over summer breaks, for example.

If you have any children who are aged under four on 31st August 2017 or who are disabled and under 17 years old, you can . If you have older children, you can register to be notified when they become eligible.

Once you have a child who is eligible for Tax-Free Childcare, you can sign up any other children at the same time.

High earners of £100,000 and above aren’t eligible for the scheme. A family with an income less than £46,000 have a much greater chance of qualifying for the scheme.

The eligibility for voucher scheme does not guarantee eligibility for Tax-Free childcare.

How does this tie in with the Childcare Voucher scheme?

Parents can’t use Tax-Free Childcare alongside Childcare Vouchers, Universal Credit or tax credits (recipients of these can still sign up for 30 hours of free childcare, though).

Childcare Vouchers remain available until October 2018. If you’re an employee and already using childcare vouchers, you can continue to use them after this date if your employer is still offering them.

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