Once fully up and running, the Tax-free Childcare scheme will be worth up to £1,200 per child, and so will save a typical working family with two children under 12 up to £2,400 a year.
It will be phased in from autumn 2015 and will ultimately be open to around 2.5 million families with children under 12. From the first year of operation, all children under 5 will be eligible, initially opening the scheme to 1.3 million families, and the scheme will build up over time to include children under 12.
To be eligible, families will have all parents in work, with each earning less than £150,000 a year, and will not already receive support through tax credits and later, Universal Credit. They will receive 20% – equivalent to the basic rate of tax – of their yearly childcare costs up to £6,000 per child.
The new Tax-free Childcare scheme will massively extend support compared to the current system of Employer Supported Childcare (ESC). ESC will continue for current members if they want to stay in it, but new claimants will get support through the new tax free offer. ESC will also continue to be open to new joiners until the Tax-free Childcare scheme is available. Eligible ESC recipients may choose to move into the new Tax-free Childcare scheme if they wish, but will not be able to receive both. For a family with two children, the new offer will be worth more than double the amount of a single claim for ESC, and will be open to around five times as many families.
For parents who currently receive childcare support through tax credits and in due course Universal Credit, the Government will increase childcare support to improve work incentives and ensure that it is worthwhile to work up to full-time hours for low and middle income parents. An additional £200m of support will be provided within Universal Credit, which is equivalent to covering 85% of childcare costs for households qualifying for the Universal Credit childcare element where the lone parent or both earners in a couple pay income tax. The details of how to provide this support will be determined as part of the consultation on the scheme for parents not in receipt of Universal Credit, to ensure the two schemes operate effectively together.
The new tax free offer will be phased in from autumn 2015, partly funded by the phasing out of ESC. The £200m Universal Credit offer is planned to be phased in from April 2016 as childcare support moves from tax credits into Universal Credit and will be funded from within social security budgets at the time. Details will be set out in future spending reviews.
The Government will shortly consult on the detail of the new Tax-free Childcare scheme, including on how employers could continue to play a role in supporting their employees with childcare costs within the new system.
Commenting, local campaigner Jennifer Nixon said:
"This announcement is much needed news for hard pressed across Newcastle who struggle to afford the costs of childcare. I know how important every penny is at the moment. This shows that the Government is committed to helping those who work hard and want to get on.
"On top of cutting the income tax bill for almost 25 million people; the Government is now introducing tax-free childcare, which could save eligible families all over Newcastle up to £2,400 a year. This money will go directly into people’s pockets and represents one of the biggest measures ever introduced to help parents with childcare costs.”