Tax relief on childcare has been available to most employees including contractors for many years now. For contractors working through their own limited company, an arrangement is normally made between the company and the registered childcare provider whereby the company will pay for a certain amount of childcare which is then made available to the employee. The amount paid by the company is an allowable expense within the accounts which achieves a tax saving.
Alternatively the company may purchase vouchers through a registered voucher scheme provider, the cost of the vouchers is paid for by the employee under a salary sacrifice arrangement earning the individual tax relief at the point they are paid their salary. This option would only be tax efficient for individuals receiving salary which exceeds the tax free allowance amounts.
The limits for tax free amounts are £243 per month for a basic rate tax payer or £124 per month for a higher rate tax payer.
April 2017 sees the roll out of a new tax free childcare initiative from the government which will potentially increase the tax reliefs available for some individuals.
Under the new scheme a working parent with a child under 12 will be eligible to open a new government provided tax free childcare account. Any funds paid into the account will be topped up by the government, so for every £8 paid in, the government will add an extra £2. Up to £2,000 per child can be received from the government which can be far greater than the current tax savings available. Payments can be made directly from the account to the childcare provider.
The scheme is being rolled out during 2017 with all eligible parents being able to create an account by the end of the year.