It can be difficult being self-employed and a parent. This is complicated further by having to understand what child support you can receive or be expected to pay. The UK has differing levels of support available to the public that are dependent on your financial circumstances. Your current job is also taken into account which means there are different levels for small business owners, contractors and freelancers. The number of children you have will also be taken into account. You might be a self-employed parent who must pay child support but need to know how much is expected.
With an already busy schedule to get through, sorting out child support can add another level of stress. To support you, we have compiled all the information you need into one complete guide.
Tax-Free Childcare Initiative
What is the Tax-Free Childcare Initiative?
In 2017, the UK Government introduced Tax-Free Childcare, which is an initiative that greatly benefits individuals who are self-employed. The tax-free childcare scheme allows parents to have all of their childcare costs topped up by the government. This top equates to 20%. This is calculated per child with a limit of £2,000 (£4,000 if your child has a disability).
Do I qualify for the Tax-Free Childcare Initiative?
You qualify for this scheme if both parents are working at least 16 hours a week and earning the National Living Wage, which is currently £120 a week. If you are claiming tax credits or universal credit, you cannot claim Tax-Free Childcare. If one parent earns more than £100,000 a year, both parents are disqualified from the scheme.
What is the difference between a Childcare Voucher and Tax-Free Childcare?
Her Majesty’s Revenue and Customs (HMRC) rolled out the tax-free childcare scheme in April 2017. The plan is that this initiative phases out the Childcare Voucher programme. The final applications for the voucher programme is October 2018.
Childcare Vouchers were distributed by employers. This meant that self-employed workers could not claim this financial support for their child. However, much like the Childcare Voucher scheme, the new tax-free initiative pays per child instead of by parent.
How does tax-free childcare work in the UK?
Tax-free childcare works by both parents setting up an account online with HMRC. Parents then pay into this account as they please. The money placed into this account can be used for childcare whenever it’s needed. Parents need to bear in mind that their childcare provider must be registered to this scheme.
If at any point the account holder decides to withdraw this money for anything other than childcare, the government will remove their contribution.
What is Child Maintenance?
Child Maintenance paid by a parent to the parent who has the day-to-day care of the child – this is calculated based on circumstances. This is then reviewed every year as parents might be affected by a change in their circumstances. Parents can also set up their own family-based maintenance agreement for sharing care and buying things for the child directly.
Child Maintenance Calculation Process
- Working out income – This is the paying parent’s yearly gross from information supplied by HMRC.
- Identify things that affect income – The Child Maintenance Service (CMS) checks for anything that could change the gross income amount (this includes pension payments and other support paid for children). This is then converted into a weekly figure.
- Maintenance rates for the paying parent:
- Unknown Weekly Income – Default Rate: £38 for 1 Child, £51 for 2 children, £61 for 3 or more children.
- Below £7 a week – No payment is expected.
- £7 to £100 a week or if this paying parent receives benefits – Flat rate of £7 a week.
- £100.01 to £199.99 a week – Reduced rate that is calculated using a formula.
- £200 to £3,000 – Basic rate calculated using a formula.
- If the paying parent receives a gross weekly income that is greater than £3,000 a week, the receiving parent can apply to the courts for extra child maintenance.
- Other children – CMS takes into account the number of children a paying parent has to provide maintenance for. This includes children living with them and any arrangements made directly with an ex-partner.
- Weekly amount of child maintenance to be paid – This is when the expected amount is decided.
- Shared care of children – This is defined as when a paying parent’s child stays overnight with them. In these cases, the CMS will deduct the amount expected based on the average number of “shared care” nights take place a week.
What Child Maintenance will I be expected to pay as a self-employed individual?
If you are a self-employed paying parent, you will be expected to pay child maintenance in the same way as any other paying parent. The CMS will work out your net weekly income and work out the amount you will be expected to pay for each child. However, CMS calculate self-employed parents slightly differently.
How does the CMS work out self-employed earnings?
If it is possible to do so, CMS will work out the average weekly earnings of a self-employed worker from the most recent tax year. If you have only just started as a self-employed worker, then figures will be taken from the gross income your business has earned so far.
To correctly work out your earnings, CMS will calculate the gross income of the business. This includes any reasonable expenses that have been paid to run the business – this does not include capital spending or business entertainment purposes. Your VAT paid is also used for calculation.
These average weekly earnings are then used to work how much child maintenance you will be expected to pay. This is done in exactly the same way as paying parents who are not in self-employment.
As specialist accountants for self-employed workers such as contractors, freelancers and small business owners, 3 Wise Bears can advise you on your finances to ensure you can get the right child support for your circumstances. For information, contact us today and speak to a member of our expert team.