Government Support and Child Care.
If you have children, then the Government support you in various ways with your childcare costs. There are three main initiatives and even the government admit that 4 out of 5 people don’t claim all they are entitled to, so we have tried to summarise the schemes below as well as point out scenarios that can cause families to either owe HMRC money or not claim all the allowances available to them.
Look out for our tax saving tips too as these can save you £000’s of pounds if you understand and act on the rules.
1st Government incentive: Child Benefit
All families are entitled to Child benefit as a cash payment from the government at £21.15 per week for a first child and £14 per week for each additional child.
However, if either you or your partner have adjusted net income over £50,000 then your child benefit must be repaid to HMRC and by the time your adjusted net income reaches £60,000, all the child benefit must be repaid.
It is your responsibility to repay Child benefit to HMRC and this is done by submitting a self-assessment tax return annually. If you fail to do this HMRC will pick you up and demand repayment from you along with possible penalties and interest.
Now let’s look at an individual earning just over £50,000 p.a. with 3 children. Child benefit will be £49.15 per week or £2,555.80 per annum. Let’s say you earn an extra £1,000, you will pay tax at 40% on that income plus employees NIC at probably 2%, but in addition you will be required to repay Child benefit at the rate of £255.80 per £1,000.
This means that you will losing 67.5% of your income to “tax”.
PJCO Tax tip:
If you are in this position, why not consider making extra personal pension contributions. You can reduce your adjusted net income by making pension payments, saving tax and child benefit repayment and, in effect, get up to 67.5% tax relief on those contributions.
2nd Government incentive: Tax Free Childcare
- You can register for an online childcare account for each child where the government contributes £2 for every £8 you pay into that account. You then pay your childcare provider directly from the online account. The scheme is worth up to £2,000 p.a. per child.
- Using this scheme, you can reduce your childcare costs by 20%!
- Again, with this scheme, there are eligibility rules and here if you or your partner have adjusted income over £100,000 then you cannot apply for an online account.
- Let’s look at an individual earning just over £100,000 per annum with 3 children. you will no longer be getting Child benefit, that will have been repaid in full to HMRC once your earnings reached £60,000 and because your income is now just over £100,000 per annum you will be losing the Tax-Free childcare for all three children worth £6,000 per annum.
- Again, let’s say you earn an extra £1,000 as a bonus. Because your income is now above £100,000 you will be losing your personal tax-free allowance at the rate of £1 for every £2 of income above the £100k limit. This in effect means that you are paying 60% tax plus 2% NI on that bonus. It’s even worse if you were earning £99,999 before the £1,000 bonus, because the bonus will mean that you lose all £6,000 of the government’s contribution to Childcare.
- A £1,000 bonus could cost you and your family £5,620 in cash terms! This cannot be what the government intended when introducing the rules, but it is what happens.
PJCO Tax tip:
- If you are in this position and you have read this blog before the end of the tax year to 5th April in which it occurs there is something you can do about it.
- Once again, it involves reducing your “net adjusted income” to below £100,000 by making extra pension contributions. Not only will you get up to 62% tax relief on the pension contribution, you will also be able to retain £6,000 in government childcare contributions. By making a £800 net pension payment, you will get a tax refund of £400 plus £6,000 in extra childcare costs.
- We think this is probably the most tax effective tax tip we have even given – invest £800 to get £6,400. That a 700% return on investment!
3rd Government Incentive: 30 Hours Free Childcare for 3–4-year-olds
- This government incentive will pay for up to 30 hours of childcare per week for 38 weeks for children aged between three and four years old.
- If you or your partners “net adjusted income” goes over £100,000 then this incentive is no longer available to you. It’s also not available if you don’t earn at least the national minimum wage, but you should still be entitled to 15 hours per week.
- This could be worth £11,400 per annum if nursery costs are say £10 per hour.
PJCO Tax tip:
- You have guessed it, once again its pension contribution to adjust your net adjusted income to below £100,000.
- A £800 net pension contribution could give you a £400 tax refund plus an extra £5,700 of childcare cost.
- Finally, if you don’t want to make pension contributions to adjust your “Net adjusted income” you can get the same effect by making “gift aid” donations to Charity
- All these rules are even more bizarre because if both partners are working and each earn under £100,000, they will be eligible for Tax Free Child Care and also 30 hours free childcare per week but if one parent earns nothing and the other earns £100,001 they would not qualify for either incentive despite earning half the income!
By not understanding the Childcare System, your family could lose out on over £12,000 of extra cash – here are the relevant links:
- https://www.gov.uk/child-benefit/what-youll-get
- https://www.gov.uk/tax-free-childcare
- https://www.gov.uk/sign-in-childcare-account
If you would like to know where you stand with Government Support and Child Care then book a free discovery call with us today.
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