‘Tax-Free Childcare’ (TFC) is a new scheme that is being introduced by the Government. The intention is that it will be introduced 2017. In fact it’s unrelated to the tax system although effectively the parent saves 20% of their childcare costs. This is how it works:
A parent can put money into an online account and the government will top it up by 20p of every 80p the parent puts in, up to £10,000 a year per child. So if a parent has childcare costs of more than £10,000 a year for one child, they would put in £8,000 and the Government will put in £2,000.
To give an idea of how this compares with CCVs, with TFC, a family saves 20% of up to £10,000 per child. With CCVs a basic rate taxpayer saves 32% of up to £2,916 (and double for two parents). A higher rate taxpayer pre 2011 saves £42% of up to £2916. A higher rate taxpayer post 2011 saves 42% of up to £1,484.
An important point is that TFC is per child, whereas CCVs are per parent. So a family with two working parents can double their savings by both getting CCVs, and a family with two or more children can make greater savings with TFC.
As a rule, for a family with one child and two working parents, they would need childcare costs of greater than £9,660 to benefit more with TFC than CCVs.
Another thing to consider is that not all families are eligible for TFC. For example if one parent is not working, then neither parent is eligible for TFC and a family in receipt of universal credit cannot also get TFC.
At the moment you do not need to do anything, as the new scheme will not be introduced until 2017. It is advised to remain in the existing CCV scheme, even for a minimal value to ensure that you have the choice of scheme. Parents not already getting CCVs, will not be able to start after the TFC scheme has been introduced.