Nurseries, pre-schools, childminders and out-of-school clubs are being sent letters from HMRC inviting them to sign up for Tax-Free Childcare.
Early years providers will need to be signed up to the scheme in order to offer it to parents.
Letters are being sent out to more than 100,000 registered UK childcare providers in batches during September and October.
The Government has estimated that around two million households will be eligible for the scheme that will replace childcare vouchers, which will be phased out by April 2018 (although those families already signed up to them will still be able to use them).
Tax-Free Childcare will provide parents with support towards childcare costs of up to £2,000 per child per year, or £4,000 if a child is disabled.
To receive the payments the provider must be registered with Ofsted or a childminder agency.
Tax-Free Childcare will be launched from early 2017. The scheme will be rolled out gradually, with parents of the youngest children able to apply first. Parents will be able to apply for all their children at the same time when their youngest child becomes eligible. All eligible parents will be able to join the scheme by the end of 2017.
Parents who want to pay for childcare through the scheme can only do so if their provider has signed up to receive the payments.
Unlike with vouchers, self-employed parents are eligible for Tax-Free Childcare and eligibility is not dependent on employers offering it.
Chief secretary to the Treasury, David Gauke, said, ‘This Government is committed to supporting families with their childcare costs and this scheme will make a real difference for parents. Tax-Free Childcare has been designed to be quick and easy to use for providers and I encourage them to sign up early.’
The National Day Nurseries Association is calling on its members to sign up to the scheme. Chief executive Purnima Tanuku said, ‘It is good that parents are getting this extra help towards the cost of childcare.
‘It is crucial that there is a smooth implementation of this new scheme for childcare providers and parents alike and that additional administration is kept to a minimum.
‘Long-term, there is a strong case for the new childcare accounts that are being created for Tax-Free Childcare to be used in future as the basis for streaming all the available funding for childcare into one single account. In this way, the funding will follow the child and give parents their choice of childcare provider.’
Neil Leitch, chief executive of the Pre-school Learning Alliance, said, ‘It is encouraging to see that the Government is taking steps to ensure providers are aware of the impending roll-out of the scheme. This is a significant change for the sector, so it’s important providers have ample time to prepare.’
However, he added, ‘The scheme does nothing to address the root cause of childcare cost rises: that is, the fact that providers are having to charge higher fees to make up for shortfalls in Government funding. It’s vital that Government uses the time prior to the launch to listen to the sector’s responses to the funding consultation, and implement practical measures to both support providers and ensure parents have access to high-quality, affordable and, crucially, sustainable early years care and education.’
The Government says it has called the scheme ‘tax-free’ childcare because for every 80p the parent pays in, the state will pay an extra 20p, equivalent to the basic rate of tax most people pay (20 per cent).
However, the fact the scheme is available to well-off families – who could potentially be earning a joint income of £200,000 and be eligible – has caused controversy.
Childcare voucher providers claim that most basic rate taxpayers will be worse off under Tax-Free Childcare.
Research carried out by voucher provider Sodexo Benefits and Rewards Services has found the majority of higher-rate taxpayers will gain, while most of those paying the basic rate will lose out.
It claims that 64 per cent of families will be worse off under the scheme, rising to 82 per cent of basic rate taxpayers. Moreover, 56 per cent of lone parent families will be worse off.
In contrast, the research found that 80 per cent of higher-rate taxpayers with two or more children will be better off under Tax-Free Childcare than vouchers.
The data was collected from 9,259 families who used Sodexo’s online childcare calculator between November 2014 and August 2016. The tool allows families to apply their individual circumstances to an algorithm that assesses which scheme would give the most savings.
The voucher provider is urging parents to sign up to vouchers before they are phased out.
Iain McMath, CEO of Sodexo, said, ‘Tax-Free Childcare is going to have a serious impact on most families’ finances come 2018 and, unfortunately, it is those who are most in need of government support that are set to lose out: single-parent families and those paying basic rate tax.
‘Many parents still don’t realise that this change is being implemented, and there is very little information available about Tax-Free Childcare for those who are aware. While the new scheme is designed to encourage parents back to work, in reality this will not be the result.’
Mr Leitch echoed concern about the scheme, ‘and in particular the fact it is regressive in nature, as the more a family can afford to pay into their account, the more support they will receive from the Government. While this may benefit more affluent families quite significantly, it offers limited help to many of those who need it most.’
Busy Bees Benefits’ research confirms similar findings. It said that it has been offering parents individual assessments of their circumstances to help them decide which scheme will be better for their families.
Wojciech Dochan, managing director at Busy Bees Benefits, commented, ‘From these assessments and research we have carried out we have found that at least 80 per cent of parents will be better off continuing to use childcare vouchers rather than signing up to the new scheme.’
According to Busy Bees Benefits, childcare vouchers require less spend in order to get the maximum savings, as each parent needs to only pay £2,916 per year to get the maximum saving of £933 per parent, whereas parents would need to spend £10,000 to get the maximum savings of £2,000 per child with Tax-Free Childcare.
HOW TAX-FREE CHILDCARE WORKS
Invitation letters will be issued to registered childcare providers in batches during September and October.
Invitation letters will contain the childcare provider’s user ID, which they will need to start the sign-up process. Providers will then need to go online and:
confirm their name and address details
enter their ten-digit Unique Tax Reference (UTR) number. This is the number that HM Revenue and Customs (HMRC) gave them when they first registered their business; or, if they are a nanny, their National Insurance number
provide the details of the bank account they want to receive Tax-Free Childcare payments into.
To qualify, parents will have to be in work, and earning around £115 a week and not more than £100,000 each per year and have children under 12, or under 17 for children with disabilities.
Parents will be able to open an online childcare account, which they can pay into, and receive a Government top-up. They can then use this to cover the cost of childcare with a registered provider.
Other family members or employers can also pay into the account and it can be topped up at any time.
Parents will be able to use Tax-Free Childcare to pay for breakfast and after-school clubs at their child’s school.
Guidance on Tax-Free Childcare: