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Childcare vouchers or tax-free childcare? Major tax changes for parents in 2018-19

Find out which allowances and benefits can help your children

Childcare vouchers or tax-free childcare? Major tax changes for parents in 2018-19

With the 2018-19 tax year kicking off on 6 April, new rules will affect anyone caring for a child – especially if you need help towards childcare costs.

Among the biggest changes is the extension of childcare vouchers for another six months, giving parents a choice between two different government schemes.

We have rounded up how childcare vouchers compare to tax-free childcare, as well as other changes that could affect parents’ finances this year.

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Childcare vouchers extended

The childcare vouchers scheme was originally due to finish this month, but it has been extended to allow for new subscriptions until October 2018.

This is an optional salary sacrifice scheme offered by some employers, where you can exchange part of your salary for childcare vouchers – before tax deductions – to pay an approved care provider.

If you’re already to signed up for childcare vouchers, you can continue to claim them after October, as long as your employer continues to offer them.

Childcare vouchers are for those with children aged 15 and under. There are varying amounts of vouchers you can apply for, depending on your income – and both parents can claim if each has an employer that offer the scheme.

The limits are the same whether you have one or several children, set at the rates below.

How does tax-free childcare compare?

Tax-free childcare has been introduced to replace childcare vouchers. Launched in April 2017, it can give eligible families a 20% top-up on childcare costs.

If you sign up for the scheme, the government will pay you £2 for every £8 you spend on childcare, up to £2,000 per child each year. For disabled children, you can claim up to £4,000 a year.

You receive the same rate for each child, meaning this may be more attractive for large families than childcare vouchers.

But unlike vouchers, this scheme can only be used for for children up to the age of 11 (or up to the age of 17 for disabled children).

Both parents must earn a minimum of £120/week each, but less than £100,000 a year combined – either from a salary or self-employment. By contrast, the self-employed can’t claim childcare vouchers.

You can still claim for tax-free childcare if either parent doesn’t work but receives the following benefits:

  • Carer’s allowance
  • Severe disability allowance
  • Contribution-based employment and support allowance
  • National Insurance credits
  • Incapacity benefit.

From October 2018, new applicants will only be able to choose tax-free childcare – so work out now which scheme would best suit your family.

Other tax changes affecting parents

Aside from childcare vouchers, a number of other government schemes for parents are changing. Below, we explain how this is likely to affect you.

1. The junior Isa allowance has increased

For the new tax year, the junior Isa allowance has increased to £4,260 – up from £4,128 in 2017-18.

This allowance means that you can deposit up to £4,260 in your child’s junior Isa between now and 5 April 2019 (when the tax year ends) without paying tax on interest earned.

See below for the junior Isa accounts offering the highest rates of interest.

While parents are responsible for opening and managing a junior Isa, the money belongs to the child and so withdrawals aren’t allowed until they turn 18. If the money is left in the account, it will automatically turn into an adult Isa.

You can only have one junior cash Isa, and one junior stocks and shares Isa per child.

If your child is aged 16-17 there is a loophole to take advantage of – children can also open an adult Isa at 16, meaning that they can take advantage of the £20,000 adult Isa allowance in addition to the £4,260 Junior Isa allowance.

For other ways on how you can build up savings for your kids, see our guide on the best ways to save for children.

2. Child tax credit rates are changing

Child tax credits can be used to boost your income if you’re responsible for at least one child or young person.

The amount you receive is dependent on the different ‘elements’ that the credits are based on. These elements include:

  • Family element The basic element for families responsible for one or more children.
  • Child element One for each child or young person you’re responsible for.
  • Disability element One for each child you are responsible for if you’re receiving disability living allowance for the child, or if the child is registered blind or has been taken off the blind register in the 28 weeks before the date of the claim.
  • Severe disability element One for each child you’re responsible for if you receive the Highest Rate Care Component of Disability Living Allowance for the child.

Child tax credits are paid until the September following a child’s 16th birthday. For children who continue full-time education or enter approved unpaid training, parents can receive child tax credit until the child is 20 years old.

To be eligible for the maximum amount of child tax credit, your individual earnings can’t exceed £16,105. This is unchanged from 2017-18.

If you earn more than this, the tax credits you receive will be reduced by 41p for every £1 of income you earn over the threshold.

Most of the elements for child tax credit are remaining unchanged from 2017-18 – the family element is still £545; the child element for each child or young person you’re responsible for is £2,780.

But the disabled child element has risen by £100 to £3,275, and the severely disabled child element has increased to £4,600 up from £4,465 in 2017-18.

If you live in a Universal Credit area and don’t already receive child tax credit, you won’t be able to start a new application unless you have three or more children.

You can’t claim child tax credits if you opt for tax-free childcare. However, you can still get childcare vouchers along with child tax credits.

3. Inheritance tax allowance is on the up

If you’re looking to leave your children some or all of your estate in your will, make sure you’re aware of the latest inheritance tax changes.

As of the 2018-19 tax year, the inheritance tax allowance – known as the nil-rate band – stands at £325,000 per person, so couples who are married or in a civil partnership can pass on a collective £650,000 to their heirs tax-free.

If your estate includes your home, you get an additional £125,000 per person (this is up from £100,000 in 2017-18) – this is the residence nil-rate band. So, collectively, those inheriting a property from a couple can have a £900,000 tax-free allowance.

Any sums exceeding this will be taxed at 40%.

But there is a caveat for this, as property must be passed on to ‘direct descendants’ in order to qualify for this additional tax allowance. This means it must be left to:

  • Children and their spouses or civil partners
  • Grandchildren and their spouses or civil partners
  • Great-grandchildren and their spouses or civil partners
  • Stepchildren
  • Adopted children
  • Foster children
  • Children who were under the guardianship of the people passing on their estate.

If your estate is worth £2m or more, you’ll lose part of the property-related allowance – for every £2 over £2m you lose £1 of the allowance. So, estates of £2.25m or more won’t benefit from any property allowance.

4. Guardians allowance has gone up

The amount of guardians allowance has increased for the 2018-19 tax year. The amount you receive each week is now £17.20, up from £16.70 in 2017-18.

To receive guardians allowance, all of the following must apply:

  • You’re bringing up someone else’s child.
  • The child’s parents are dead (there can be a surviving parent, but you can only claim if you don’t know where that parent is, the surviving parent does not have custody following a divorce, the parent is unknown, the parent will be in prison for at least two years after the death of the other parent or the surviving parent is in hospital by court order).
  • You qualify for child benefit.
  • One of the parents was born in the UK.

5. Free school meals have a new threshold

First introduced in September 2014, the free school meals initiative was introduced in order for children from low-earning families on benefits to receive free school lunches.

Eligibility for free school meals is now dependent on household income where the child lives, with a £7,400 annual threshold under the Universal Credit system – which is gradually being rolled out across the country.

To see whether free school meals are available in your area and how to apply through your local authority, check with HMRC.

After the roll-out of Universal Credit is complete, any children who were already receiving free school meals from before will continue to do so until they move to a new stage of school, eg primary to secondary school.

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