25 February 2019

Tax-free childcare flops in first year at just £32mn in top-up payments

6 min read

 
Royal London logo

Becky O'Connor

Personal Finance Specialist

Share

Data from HM Revenue & Customs published last week (Thursday 21 February 2019) showed the Government paid just £32 million in ‘top-ups’ towards 50,000 tax-free childcare accounts being used by parents during the scheme’s first year.

The sum paid out is less than one tenth of the £390mn the Government estimated in 2017 the scheme would cost in its first year. It had estimated that 1.5 million families would be eligible and that they would receive an average yearly top-up payment of £800 per child [1].

Parents using the new accounts receive 20 per cent from the Government on whatever they put into the account, up to a maximum top-up of £2,000 a year per child.

Yesterday’s figures suggest that so far, the average top-up per child is £640 - £160 a year less than anticipated.  

For a basic-rate taxpaying, working couple with two children in receipt of childcare, this is around £600 a year less than the savings they could have made on the old childcare voucher scheme, which was offered through some employers but was closed to new applicants in October 2018.

Tax-free childcare accounts were introduced in April 2017 for families with children aged 3 or under and rolled out to older age groups, until they were fully available to all eligible families from February 2018.

Commenting on the figures, Becky O’Connor, personal finance specialist for Royal London, said:

“These figures reveal that so far, the new tax-free childcare scheme has been a flop. The £32 million top-up payment to 50,000 parents in the first year is peanuts compared to the Government’s own forecasts. The scheme was hailed as the solution to unaffordable childcare for 1.5 million families, but it is failing to reach them.

For those it is reaching, it is significantly less generous than the voucher scheme it is replacing, delivering around £600 a year less in savings for a family with two basic-rate taxpaying parents and two children.

“When compared with the cost to the Government of the old voucher scheme, tax-free childcare is beginning to look more like a money-saving exercise for the Treasury than a proper support scheme. But parents at least need to be better informed about the offer now on the table. Childcare costs are impossible to meet for many families and they deserve better than this.”

Tax-free childcare accounts are issued per child, whereas vouchers were per parent, making a direct comparison on the savings difficult and dependent on individual circumstances such as the number of children and the number of parents in a family.

However, for the majority of families, the average top-up payment of £640 per child compares poorly with the £933 a year per parent that a basic-rate taxpayer in receipt of childcare vouchers from their employer could receive.

For a two-parent, two-child family where the parents are basic-rate taxpayers, tax-free childcare would have delivered an average £1,280 for the year in 2017/18, based on the Revenue’s figures, compared with £1,866 in tax and NI savings for the year on childcare vouchers a - difference of nearly £600 per year.

Tax-free childcare was designed to be available to a larger number of parents than childcare vouchers, which were only available to parents employed by companies that were willing to offer them. Those who were already receiving vouchers can continue to use them for as long as they are offered by their employer.

The key winners of tax-free childcare are the self-employed or anyone employed by a business that did not offer childcare vouchers, as they were not previously able to access the voucher scheme. Single parents, families with a large number of children, families with disabled children (who receive a top-up of 40% rather than 20%) or families with particularly high childcare costs should also benefit more from the new scheme than the old voucher scheme.

However, for basic-rate taxpaying parents with employers that are offering vouchers – around 600,000 families, according to government estimates, the old scheme is far more financially beneficial. It delivers income tax and National Insurance savings on vouchers worth £243 a month for basic rate taxpayers and £124 a month for higher-rate taxpayers and is available until a child is 15, rather than 12 – the age limit for tax-free childcare.

A Freedom of Information Act by Royal London made in November 2018 found that just 20,000 parents using the new tax-free childcare accounts had swapped away from childcare vouchers they were previously using, a strong indication of a vote of no confidence in the new scheme, from parents who have the choice between the two.

50,000 tax-free childcare accounts were in use by the end of March 2018, according to figures published last week, although this update also showed the number of used accounts had increased to 91,000 by December 2018. [2]

Meanwhile there were 820,000 parents claiming employer-provided childcare, which includes vouchers as well as workplace nurseries, in 2018, at a total cost to the Treasury of £520 million in lost income tax in 2017/18. [3]

The Government had forecast that the tax-free childcare scheme would cost £390mn [4] in the first year, with the “main” cost being top-ups to parents.

Notes to editors:

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/652939/Tax-free_childcare_Impact_Assessment-March_2017.pdf

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/778308/Tax-Free_Childcare_Statistics_Commentary_December_2018.pdf

[3] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/774765/Jan19_Principal_Reliefs_Final.pdf

[4] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/652939/Tax-free_childcare_Impact_Assessment-March_2017.pdf

More information about uptake and the rollout of the scheme can be found here

HMRC tax receipts and benefits table here (tax-free childcare statistics in final column)

For further information please contact:

Becky O’Connor, Personal Finance Specialist

About Royal London:

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.