Overhaul your childcare costs

Childcare is an enormous expense for London families -- on average, about a third of parents’ income.  

There are quite a few ways for parents to save on childcare cost: childcare vouchers, the new ‘tax-free childcare’ scheme, nanny share, the 30 hours free childcare, and working tax credits.

Some of these are really worth going after, some not so much.

In this blog, we evaluate each of them, from the perspective of parents who employ a nanny or who might consider employing one in future.

1. Figure out how much you could save on childcare vouchers

Many large workplaces offer a childcare vouchers scheme which allow parents to pay for childcare out of their pre-tax salary via ‘salary sacrifice’. Here’s how it works: you give up (say) £1000 of your salary pre-tax, and in return you get £1000 of vouchers. Since you’re buying the vouchers with your pre-tax salary, this means you don’t need to pay tax or NI on that £1000 – which saves you money. You can then spend the vouchers on all sorts of childcare, including some nannies.

What it’s worth: Between £590 and £930 per parent per year, depending on your income. Eligibility for childcare vouchers reduces as your income increases, so whether it’s worth the bother of joining up depends on your income. If you only pay tax at the basic rate of 20%, you’re allowed £55 per week per parent, for a maximum annual saving of £930 per parent. If you’re a 40% taxpayer that goes down to £28/week, saving you £630 per parent per year. Top rate (45%) taxpayers get £25/week, saving £590 per parent per year. These are maximums and assume you meet the other criteria for joining up.

The good stuff about vouchers:

  • They last for ages - until your youngest’s 15th birthday
  • You can use them on lots of forms of childcare, including nurseries, childminders, holiday clubs and after school clubs. Anyone (or any institution) who is Ofsted registered can be paid in vouchers. In theory this could even cover a tutor or au pair.

The annoying things about vouchers:

  • Not all workplaces offer them
  • They can be a pain to administer. For example, since they don’t cover anywhere near the full time cost of childcare, you’ll likely need to make up the rest in direct payments. If you have a nanny, she will need to register with Ofsted before you can use them. Not all nannies can do this, or are willing to - so do check with yours.
  • Refunds are at your employer’s discretion, so be careful about running up huge mountains of vouchers without using them. If you do get a refund, tax and NI would be deducted.
  • Since vouchers literally lower your salary, they can affect other benefits such as maternity pay and pension. However, for most people this will be outweighed by the benefits. (If you’re a recipient of tax credits, they might be affected too. If you’re concerned about this, check out this government calculator or call the tax credits helpline on 0345 300 3900.)

The bottom line: For most people, worth the effort. See if your workplace offers a scheme.

2. Figure out whether you should enrol in childcare vouchers now or wait for ‘tax free childcare’

From early 2017, a new ‘tax-free childcare’ scheme will be rolled out in addition to the existing childcare vouchers scheme. This new scheme will be available to all eligible parents by the end of 2017.

‘Tax-free’ is a bit of a misnomer. What you get is 20% of your yearly costs paid, up to a maximum of £2,000 per child (£4000 if the child is disabled). For most people using a nanny, that’s quite some way from making childcare ‘tax free’.

Also, you won’t be eligible for the new scheme if either parent earns more than £100,000 per year, or less than £115 per week.

That said, the new regime is better than the old one in a few ways: it’s available to the self-employed, for one. So if you’re a freelancer you may be able to get tax relief on childcare for the first time.

From April 2018, you won’t be able to join the childcare voucher scheme. However, if you’re already using vouchers you can continue. You can’t be in both, so it’s worth figuring out which is better for you.

In summary, taxfree childcare is best if...

  • You’re self employed -- so vouchers aren’t an option
  • You have 2 or more children - so you’ll get more with taxfree childcare than vouchers

Childcare vouchers are best if...

  • One or more parents earns over £100K
  • One or more parents doesn’t work at all
  • You’re a lower earning parent (basic rate taxpayer) with childcare costs of under £9336
  • You’re a higher earning parent (higher rate taxpayer) with childcare costs under £6252
  • Want to know more? There’s a calculator here 

If you decide to stick with the childcare vouchers scheme, you have until April 2018 to enter your company’s scheme. After that, they’ll be closed to new entrants.

The bottom line: Many nanny employers will be better off sticking with the old childcare vouchers

3. Understand what a nanny would cost compared to your other options

Assuming you’re not using a nanny right now, but it’s something you’ve thought about… If you have 2 or more young children, it actually might work out cheaper to have a nanny than to put them both in nursery or with a childminder. This is particularly true if you live in a part of London with few childminders and expensive nurseries.

This is for two reasons:  firstly, nannies’ rates don’t differ much by location whereas childminders and nurseries do (due to mad property prices); and secondly, nannies charge by the hour regardless of the number of children, whereas childminders and nurseries charge per child. So if a nursery costs you £15,000 per year it could cost double that for two children. Once you’re paying around £30,000 you’re starting to get into nanny territory. Add in another child to share with, either of the same age or after school and a nanny starts to become excellent value.

For a full time nanny, as a general guide, you should budget around £14-18/hour. You’ll find both cheaper and more expensive than that out there – when comparing, do make sure you always compare any alternatives to the nanny’s total costs not just her net rate.

The bottom line: Nanny might be the best value option for families with multiple children

4. Register for a nanny share

Doing a ‘nanny share’ with another family generally saves about a third of the cost. The children play together, which is brilliant for them, plus the nanny gets paid a bit more. 

If you’ve only got one child, nanny share is a particularly good way to make a nanny better value. A nanny share generally costs £9-11 per hour, so the savings can be very substantial – you could save £10,000 to £15,000 per year vs. a full time sole nanny.

If you don’t already have a family to share with, you can register with Koru Kids and we’ll look for one for you. Registration is quick, free and there’s no obligation.

The bottom line: For many families, nanny share will be the perfect solution. If that might be you, there’s no downside to registering early to keep the option open

5. Get 30 hours free childcare at a nursery or childminder

You may have heard about the expansion of the free childcare hours from 15 to 30 hours this year. Currently, parents are entitled to 15 hours of free childcare per week at a nursery or childminder. In 2017, this entitlement will double to 30 hours per week.

Not everyone is eligible, however:

  • Your child has to be over 3 (or 2 if you’re on a low income) and under 12 (or 17 if disabled)
  • If either parent earns over £100,000, you’re not eligible. Both parents also need to work at least 16 hours per week (although they might still be eligible for the 15 hours entitlement).  

Even if you are eligible, the tricky part is finding a nursery or childminder which actually offers the free hours! Childcare providers don’t have to do so, and many don’t, since the amount they are reimbursed by the government is less than the actual cost of providing the care. Many restrict the offering to specific hours, which may or may not suit your family.

The bottom line: Great if you can get it, although the dropoffs/pickups may be logistically complex

6. See if you’re eligible for tax credits

For lower earners, there is a childcare element to the government benefit, ‘Working Tax Credits’. Figuring out an individual family’s entitlement to this element is fiendishly complicated, as the government take into account factors including your childcare costs, number of kids, the number of hours you work per week, your income, and your relationship status. It might be worth it though - the average childcare tax credit payout is over £3000 per year.

You should definitely investigate this if you’re a single parent working over 16 hours per week, or a couple both working over 16 hours per week, and your household income is under £46,000.

Even if that’s not you, you might still qualify depending on how many children you have and whether they are disabled, or whether you are disabled.

To see if you’re eligible, you can call the government’s tax credit helpline on 0345 300 3900. Ask about ‘Childcare element of Working Tax Credits’.

The bottom line: Extremely helpful for those eligible—although this probably won’t be many families who employ nannies.