- Sometimes the thought of working
when you have a young child at home
can seem counter-intuitive.
After all, childcare isn't cheap
and depending on your earning potential,
the cost of this can put a significant dent
in what ends up in your pocket.
The tax-free childcare scheme was introduced by HMRC
to assist working parents
and could save you up to 2000 pounds per year, per child.
In this video, we will cover how does it work?
Who is eligible?
Changes to the scheme due to COVID-19
and finally, how to apply.
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The tax-free childcare scheme
essentially saves you the basic rate of tax, currently 20%,
off of your childcare costs
from providers registered for the scheme.
Now these could be childminders, babysitters, playgroups,
nurseries, et cetera,
but they must be registered for the scheme.
Your child must be under the age of 11
and usually live with you.
Adopted children do qualify, but foster children do not.
When you register for the tax-free childcare scheme,
you open what's called a childcare account
on the gov.UK website.
You pay funds directly into this account,
which are then topped up by HMRC with the 20%,
the basic rate of tax.
HMRC will top this up to a maximum
of 500 pounds every three months,
so 2000 pounds per year per child
and this increases to up to 4,000 pounds
if your child has a disability.
So for example, if you have two children
and qualify for the scheme and over the course of the year,
you pay 3,200 pounds into your childcare account,
HMRC will top this up by 800 pounds,
giving you 4,000 pounds to spend on childcare
from registered providers.
You can then use your childcare account
to make one-off or regular payments for childcare.
Finally, you must reconfirm your details every three months
to keep receiving the top-ups
and to keep HMRC informed that you are eligible.
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Firstly, you will not be able to claim tax-free childcare
at the same time as tax credits, universal credit,
or childcare vouchers.
You will also not to be able to claim
if you or your partner are expecting to earn
over 100,000 pounds of adjusted net income in this tax year.
Although due to COVID-19,
there are a couple of exceptions here,
which we'll cover later on in the video.
The general eligibility requirement
for tax-free childcare for most people
is that you and your partner are both working
and earning at least the national minimum wage.
Now these vary depending on your age, but for example,
let's assume you and your partner are 30
and each earn 2000 pounds over a three month period.
Now the national living wage is 1,818 pounds 76
for this age group,
so you would qualify for tax-free childcare.
If you or your partner is self-employed
and is struggling to meet the earning requirements,
you can take an average of profits for the last 12 months
and use this figure, as HMRC understand
that self-employed earnings tend to fluctuate over the year.
Now, if you or your partner are not working,
then you may still qualify for tax-free childcare
if you receiving Incapacity Benefit,
Severe Disablement Allowance, Carer's Allowance,
or Contribution Based Employment and Support Allowance.
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Due to the outbreak of COVID-19,
HMRC have made several changes
to the eligibility requirements for tax-free childcare.
They are as follows.
You may still be eligible for tax-free childcare
if you're temporarily working less
and are on furlough through the job retention scheme,
or have claimed a self-employment support grant.
Finally, the upper limit
of 100,000 pounds adjusted net income
has been increased to 150,000 pounds for critical workers
who've worked additional hours due to COVID-19.
So if additional working hours
have pushed your income over the threshold,
you may still be eligible to claim.
You can find a link
to a list of what's counted as a critical worker
in the description box below.
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The easiest way to check if you're eligible
for tax-free childcare is to apply using HMRC's website.
Click on the link below in the description box.
The application process takes around 20 minutes
and you'll find out if you're eligible within seven days,
but often, you'll get a response almost immediately.
The application process will also check
if you're eligible for 30 hours of free childcare,
so it's definitely worth doing.
Finally, there is also a calculator
to see how much assistance you could get from HMRC
towards your childcare costs
and the links to both of these
are in the description box below.
We also have a comprehensive blog post on our website
that goes into even more detail about tax-free childcare.
Head over to our website to read it.
Once again, the link is in the description box.
I hope this video
has helped you understand the basics of tax-free childcare
and taking you one step closer to knowing your numbers.
If you found this video helpful,
or if there are any topics
you'd like us to cover in the future,
then let us know in the comments below.
Finally, make sure to like and subscribe,
as this really helps us to get our content out there.
This is Matthew Schouten for the Accounting and Tax Academy.
Thanks for tuning in.
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