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Tax Free Childcare Relief | Not quite so fair for everyone

The government is clearly determined to ensure that as many people who are able to work are indeed in productive employment, helping the economy to grow and boosting taxation revenues. Whether mothers stay at home to bring up children is a matter of personal choice and is not something that the government of the day should be deciding for them. That being said, those households where both parents choose to work either through choice or financial necessity should not be dissuaded from doing so by the relatively high costs of childcare in the UK. Following on from a debate started by leading accountants and tax services provider, Baker Tilly, we can examine the latest measure announced by the government to subsidise childcare costs and ask whether it is entirely logical and, indeed, fair.

The planned tax-free Childcare Relief scheduled to be introduced in autumn 2015 will apply to parents where neither earns more than £150,000 p.a. and neither is being supported by tax credits or Universal Credit. It effectively amounts to a 20% government subsidy towards childcare costs worth a maximum of £2,000 a year for each child up to the age of 12. So a couple with 2 qualifying children would receive £4,000 a year – equivalent to £20,000 of tax –free income. However, as the accountants point out, those earning income above the higher rate threshold of £42,285 in the tax year 2015/16 will be paying 40% tax but only getting relief at 20%.



One really has to wonder sometimes at the calibre of some of the highly paid civil servants who are responsible for the small print in new measures such as this. Just as we saw criticism of the High Income Child Benefit Charge, introduced last year, because of anomalies that were grossly unfair, so we can see similar sorts of injustices in the new Childcare Relief system.

One of the strange quirks of the Child Benefit Charge is that it starts clawing back Child Benefit as soon as one parent’s income exceeds £50,000 and recoups the entire 100% once the £60,000 income level is reached. By concentrating the entire clawback within such a narrow (£10,000 ) band of income, it means that small increases in income trigger large reductions in benefit.

Similarly, the new Childcare Relief involves anomalies that one can only describe as unfair and ill-judged. Take for example a situation where one couple has a joint annual income of £165,000 consisting of the husband earning £155,000 and the wife £10,000. By earning over the £150,000 limit, the husband automatically disqualifies this household from obtaining any relief. However, the couple next door could each be earning £140,000 p.a. and they stand to enjoy the full level of relief even though their joint annual income is a whopping £280,000.

Furthermore, one might ask, at a time of fiscal austerity, why households earning nearly £300,000 need a £2,000 subsidy for childcare in the first place.

If you would like advice on any element of tax, Baker Tilly’s team of tax services experts would be delighted to discuss your requirements with you.

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