The moment my wife and I found out we were expecting, more than a year ago, I was preparing myself for decades of being skint.
First of all, there’s managing to pay a mortgage on one salary. Then, there’s the furniture, the clothes, the car seats and the buggy to buy, not to mention the items the mum-and-dad blogs tell you are lifesavers that turn out to be useless (I’m still smarting over the £200 crib my son vehemently abhors sleeping in).
Once you’ve adapted to that, you start looking at what benefits you might be able to get. Being a financial journalist, I managed to navigate my way through the first two – applying for maternity allowance was relatively straightforward, and we managed to collect child benefit without too many hitches.
But as my wife prepares to return to work in a few months, we’ve found ourselves completely befuddled by the government’s childcare support schemes.
There are currently a number of schemes running side by side.
First there is the childcare vouchers scheme. This was originally due to end this month, but has been extended until October 2018. With my wife looking to go back to work in July, we are eligible to claim these, even beyond October.
So, how does it work? The childcare vouchers scheme is an optional ‘salary sacrifice’, offered by lots of employers. It sees you exchanging part of your salary for childcare vouchers – before tax deductions – to pay an approved care provider.
The real advantage of using salary sacrifice is that the salary you forgo is not subject to tax or National Insurance. Giving up some income this way means your overall pay packet is reduced, and you pay less tax.
You can use these for children aged 15 and under, and the amount you can claim depends on your income. Basic-rate can claim up to £243 in vouchers per month, higher-rate up to £124 per month and additional-rate taxpayers can claim up to £110 in vouchers per month.
And, helpfully, both parents can claim childcare vouchers, so long as their employers offer the scheme.
Someone earning £30,000 a year (a basic-rate taxpayer) would shave more than £930 from their tax bill if they claimed the maximum childcare vouchers.
Then, there are childcare tax credits. They’re worth up to £3,000 a year, but we don’t qualify for tax credits because our family income is too high. Similarly, our son is too young to benefit from the free nursery care (up to 30 hours) for three and four-year-olds.
Still with me? Good, as it’s about to become more complex.
Tax-free childcare has been introduced to replace childcare vouchers. Launched in April 2017, it can give eligible families a 20 per cent top-up on childcare costs.
If you sign up for the scheme, the government will pay you £2 for every £8 you spend on childcare, up to £2,000 per child each year – meaning if you spent £10,000 on childcare in a year, it would only cost £8,000. Anything above that amount needs to be solely funded yourself.
You receive the same rate for each child, meaning this is attractive for large families.
But unlike vouchers, this scheme can only be used for children up to the age of 11 (or up to the age of 17 for disabled children). Both parents must earn a minimum of £120/week each, but less than £100,000 a year each – either from a salary or self-employment.
We certainly meet the income criteria and, as my wife is self-employed, she can’t claim childcare vouchers, but can claim tax-free childcare – which suggests to me that this is the best option for us.
But is it? We’re going to have to do some serious maths to figure out which scheme we’re better off in – whether it’s effectively getting a 20 per cent discount on nursery costs, or a saving on my tax bill. I’ll need to figure out what my National Insurance and income tax savings would be, based on the maximum vouchers I can collect for my marginal tax rate and place that up against any potential saving we can make through the alternative scheme. A degree in accountancy would probably help.
Don’t get me wrong, this isn’t a grumble. I think it’s great that there are multiple ways parents are offered support for childcare. But if you’re in my position, beware – you’re going to have to tackle this conundrum head on.
It makes me long for the days when all we had to worry about was whether to buy that chic-but-pricey bedside crib, blissfully unaware of how much our unborn child would detest it.