Tax-Free Childcare: employees need to make an informed choice

21 September 2016

Research from Sodexo shows that many families may be worse off under the incoming Tax-Free Childcare scheme; highlighting just how important it is that employers communicate the differences to their employees to ensure they make an informed choice.

Almost two thirds of UK families (64%) will be worse off under the Government’s incoming Tax-Free Childcare scheme, compared to the existing employer-led Childcare Vouchers, according to research by Sodexo Benefits and Rewards Services. The research also uncovered that 82% of households paying basic rate tax with one child would lose out if they adopt the new scheme.

Tax-Free Childcare is due to roll out from early 2017, slowly phasing out Childcare Vouchers by April 2018. Those signed up for Childcare Vouchers by the cut-off date will still be able to use them once Tax-Free Childcare is live.

Childcare Vouchers have helped approximately 700,000 working families save up to £933 of tax and NI on their childcare costs per year. This can reach up to £1,866 per family if both parents receive Childcare Vouchers. This value covers an average of 54% of a family’s childcare costs for children up to the age of 15.

Tax-Free Childcare has been designed to cover up to 20% of a family’s childcare costs (up to £2,000 per child per year, until the age of 12). However, the latest figures from Sodexo suggest the new scheme will actually leave most families out of pocket and struggling to afford childcare.

Research was collected from 9,259 UK families who used Sodexo Benefits and Rewards Services’ online Childcare calculator. The online tool allows families to apply their individual circumstances to an algorithm that assesses which scheme would provide the greatest amount of saving for that family.  

The research showed the percentage of households who will be worse off with Tax-Free Childcare:

  • 82% of basic tax rate households with one child
  • 78% of basic tax rate households with one or more children
  • 71% of families with one child
  • 65% of households with two basic rate taxpayers with two or more children
  • 63% of working couples with one or more children
  • 62% of families with one child and one basic rate taxpayer
  • 56% of single parent families

In order to give themselves the best option, parents are being urged to sign up for Childcare Vouchers now, before they are closed to new entrants in April 2018. In doing so, parents will give themselves the power of choice in the long term to select the scheme which leaves them financially better off.