Childcare Costs Help Get £1,000s in tax credits & vouchers

Whether you've a wee tot or big teen, the costs of childcare can be prohibitive. Yet 100,000s of working parents are missing out on £1,000s of cash, benefits and easy help.

This step-by-step guide to boosting your childcare budget includes childcare tax credit, childcare vouchers, free school schemes and more.

Ensure you check if you're entitled to more help in the Benefits Checkup guide

Childcare isn't just for kids

The term childcare conjures up an image of a baby in swaddling cloth being doted over by a kindly nursery nurse. And while that is one element, actually it stretches far wider... any childcare you're paying for includes children of school age too.

School age generally means aged 16, but there are slightly different rules for:

Vouchers: Up to the first Saturday following 1 September after your child’s 15th birthday (or 16th birthday if they're registered blind or receive Disability Living Allowance)

Tax credits: Up to their 20th birthday as long as they are in full time education; you need to specifically claim after the 1st September following their 16th birthday and you MUST tell the tax office within one month if your child stops their education

So...

If you're paying for your stubbly six foot 15 year-old to go to an after school or summer holiday club that can count too.

It must be a registered provider

Whether your paying with vouchers, tax credits or cash, the key is that the childcare provision is registered and regulated. This includes after school and summer clubs, nurseries, playgroups, nanny, childminder or au pairs.

If you ask, most providers will simply tell you if they're registered but you can find out from your local authority’s children’s services department or search for your nearest Family Information Service on the Daycare Trust website which should be able to tell you about the provision available in your area.

Step 1: Grab tax credits

It's a common misconception that tax credits are for the unemployed, actually for help with childcare it's the opposite, you have to be in work. The Childcare Tax Credit is designed to help working parents cover some of the cost, so that they still gain by working.

The money available can be huge, so it's important to check you're eligible and it's possible 100,000s of families are missing out.

It's worth knowing it's not officially called the Childcare Tax Credit, its technical name is the Childcare Element of Working Tax Credit, yet as that's long-winded we've shortened it for the purposes of this guide. Please note it's not the same as Child Tax Credit.

Unfortunately the entitlement system and eligibility criteria are ridiculously comple but it basically boils down to the following rule of thumb....

Having said that, even some with household income above £42,000 may be eligible for decent payouts, especially if you have more kids, or a disabled child. Also, if either you or a partner are disabled you both may not need to work 16+ hours a week.

For a full and detailed guide to Tax Credits see the Tax Credits briefing note.

For a generalised check-up of whether you’re getting all the help you're due, read the Benefits Check-Up guide.

Step 2: Can you get childcare vouchers?

Childcare vouchers are a little known scheme, which can save many parents with kids aged up to 15, over £1,000 a year on childcare. They need to be offered via employers, but many large and small companies take part.

The key is it enables you to pay for childcare out of your PRE-TAX and National Insurance income. While this doesn’t sound much, the benefit is huge. Most employers work it on a salary sacrifice system, which works something like this (basic rate tax example)...

You give up £1,000 of salary, worth £700ish in your pocket. You get £1,000 of Childcare vouchers. This means you're £300 better off per grand.

Of course, once you no longer need to pay for childcare, you simply get your salary back.

BOTH parents (if basic rate tax payers or higher/top payers who joined the scheme before 5 Apr 2011) are allowed to get a maximum of £243 per month worth of vouchers meaning some families will gain £1,000s from this over a year.

From 6 Apr 2011 new joiners paying higher or top rate tax had their allowance dropped from £55 per week to a respective £28 and £22 weekly limit, so that all tax payers have roughly the same maximum tax gain.

To find out more read the full Childcare Vouchers Guide

Warning! Childcare vouchers can impact credits

If only it were that simple, sadly while childcare vouchers are conceptually great, they interact with the amount of Childcare Tax Credits you're entitled to. So while many gain from the vouchers, some people, especially on lower incomes are WORSE off using the vouchers.

This happens because..

• Vouchers don't count as paying for childcare
  
  The more you pay in childcare, the more tax credits you're eligible for, but any amount you pay in vouchers, doesn't count towards that. For example if you pay £100 a week for childcare, but use £60 of vouchers, for tax credit purposes you're only spending £40 a week on childcare, so it's this figure you must enter on your Tax Credit claim form.
  
  You must notify the tax credit office within a month that you start using childcare vouchers, so any changes can be taken into account. You may be fined if you don't.
• Salary sacrifice means you've a lower income
  
  If you're giving up salary to get vouchers, then for benefit purposes you earn a lower amount, this will increase your eligibility for tax credits.

When's it worth using them

Hard and fast rules are very difficult as there are so many variables... but here's some rough guidance.

• If you're not eligible for childcare tax credits. In this case, there's no problem, so if you're a couple where one works under 16 hours a week, or a single parent who does, or your income is too high to qualify, then there's no impact. So go for the vouchers.
• Childcare costs above £175 a week for one child, £300 for two or more? You will always be better off using vouchers for any amount above that, and may be better off for amounts below (the higher your salary the more likely).

Do a more detailed comparison on the Government’s HMRC vouchers vs. credits calculator (updated for 2012/13 from 10 April 2012) to check in detail or call the Tax Credit Helpline on 0345 300 3900.

Step 3. Free childcare for 3 or 4 year olds

Find out more

Check the Daycare Trust website for your nearest Family Information Service or check your child qualifies on the DirectGov site

There are free ‘early learning’ classes (includes time spent at a school attached nursery) available for all three or four year-olds (starting from the term following your child's third birthday).

For at least 38 weeks a year you’re entitled to 15 hours a week (to be spread over at least three days). Families with a low income may also get free classes for two year olds.

Things may be slightly different in Scotland, Wales and Northern Ireland, contact your nearest FIS to check your entitlement.

In practice this provision is offered at a range of places including Sure Start children’s centres, nurseries, pre-schools and childminders. So if you're paying for childcare, you can swap it for this free provision which could add up to a hefty saving over the year.

Step 4. Free holiday classes and activities

Find out more

Check the Daycare Trust website for your nearest Family Information Service or check your child qualifies on the DirectGov site

More ways to entertain kids:

Cheap Days Out

Cheap Theme Parks

Free Museums

Provision of holiday childcare for school-age children is often a real hit to the finances. Often parents either need to lose earning power by taking time off work or pay for professional childcare.

An alternative to this is that over the summer, and sometimes during Easter and Christmas, thousands of schemes across the UK (such as schools) offer a range of activities for children, from sports coaching to dance and music sessions.

Places aren’t just open to a school’s pupils, so if your school doesn’t have it, check others.

This is a safe and cheap way to resolve holiday childcare needs and if you need to pay for it, then this can be part of your Childcare Tax Credit application (as long as the provider is Ofsted registered). You can usually pay for the holiday provision with Childcare Vouchers, although it's best to check before booking that the school you've picked allows this.