If you pay for childcare, using special vouchers saves many parents £1,000s a year in tax. If you're not taking advantage, check them out as a matter of urgency.
They're a special government scheme operated through employers that allow you to pay for childcare from PRE-tax salary. It mightn't sound big, but the impact can be huge.
How childcare vouchers work
Childcare vouchers can save many parents with kids aged up to 15 over £1,000 a year on childcare. Frustratingly it is only available via employers, but many large and small companies take part.
The key is they enable you to pay for childcare out of your PRE-TAX and National Insurance income. While this doesn’t sound much, the benefit is huge.
It works by 'salary sacrifice'
A few very generous employers will simply give you the vouchers on top of your normal salary, but most will ask you to do what's called a 'salary sacrifice', which works something like this (basic rate tax example)...
For an accurate figure of savings look at childcare voucher calculators on Computershare Voucher Services or KiddiVouchers. Yet always check first if you're eligible for tax credits - see the tax credit warning for more info.
Of course, once you no longer need to pay for childcare, you should ensure you get your full salary back (we've never heard of this being a problem, but it's worth checking).
How many vouchers can you buy?
Basic rate tax payers (and higher/top rate payers who joined before 5 April 2011 as long as they don't take a break from the childcare voucher scheme of more than 12 months) can pay for up to £243 of childcare with vouchers each month (£55/week). This is PER PARENT so two working parents could get £486 a month of vouchers.
From 6 Apr 2011 new joiners paying higher or top rate tax had their allowance dropped so that all tax payers have roughly the same maximum tax gain. From April 2013 the limits are:
Basic (20%) Taxpayer. £55/week vouchers, max annual gain £930.
Higher (40%) Taxpayer. £28/week voucher, max annual gain £630.
Top (45%) Taxpayer. £25/week voucher, max annual gain £590.
The number of children you have doesn't impact this, the limits are the same whether you've one child or an entire Brady Bunch.
Vouchers aren't specific to each child and have a long expiry date, so if you know you're going to have higher childcare costs during the holidays collect vouchers in advance.
Also many providers will let you backdate vouchers up to six months, although your child must be born for you to be able to sign up. Check your individual provider's procedures first.
What is the new tax-free childcare scheme?
In March 2013 the Government announced a new tax-free childcare scheme will replace the existing childcare voucher scheme. It's due to start in late 2015, after the next general election.
Under the proposed initiative, eligible families will get 20% of their yearly childcare costs up to £6,000 per child, paid for by the Government. This could mean payments of up to £1,200 per child.
What counts as childcare?
The vouchers cover childcare up to 1 September after your child's 15th birthday (16th if they are disabled).
The provider must be regulated
They're usable by any nursery, playgroup, nanny, childminder or au pair who is registered and regulated - most are.
Surprisingly, you can also use childcare vouchers for tuition for your child - as the tutor is providing 'childcare' at the same time as the tuition. However, the tutor/institution must be regulated and accept vouchers, so do check.
The easiest way is to simply ask them, yet you can also ask 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.
Plus you can check on these official websites:
In England. Go to the Ofsted website or call 0300 123 1231
In Wales. Check the Care and Social Services Inspectorate website
In Scotland. Go to the Care Inspectorate website or call 0845 600 9527
In Northern Ireland. Check the Dept of Health, Social Services and Public Safety website or call 028 9052 0500
Those whose relatives look after a child in the child's own home won't be eligible to receive the vouchers. Yet vouchers can be claimed for carers that are registered childminders looking after a child in their own home.
Further help with childcare costs
There are other schemes in place to help with childcare costs, including tax credits, holiday provision, and, from September 2010, at least 15 hours a week free childcare (to be spread over at least three days) for all three and four year olds before they reach school starting age (term time only). Read the Childcare Costs guide for more info.
Where to get vouchers from?
Any parent, or those with parental responsibility for a child living with them, is eligible for the vouchers. Yet sadly, to get them, your employer must run a scheme. Follow these steps:
Ask your employer if it runs a childcare voucher scheme.
Check with your Human Resources / Personnel department to see if yours does. Most big employers, such as Lloyds, Barclays and Sony offer the schemes. Many NHS Trusts and Ministry of Defence departments do too and since 2006 teachers have also been able to use the scheme.
Sadly, if you're a sole trader you're not eligible, as you're not classed as an employer.
What if your employer doesn't offer a scheme?
Providing childcare vouchers shouldn't cost your employer any money. In fact, as they don't pay national insurance on the vouchers, it actually makes them serious proft - £100s per employee! So try and persuade them; perhaps chat to other parents and go as a group to request the facility, even printing out this article to show them.
Firms can offer voucher schemes one of two ways, either by operating the scheme themselves or by using one of the many voucher companies to do all the admin for them. The fee for this should be less than the firm gains in national insurance, so they'll still profit.
Warning! Vouchers can cost you
While many people can save by using vouchers there's one little and one big warning.
Technically you earn less...
If to get vouchers you need to sacrifice some of your salary, this can have an impact on other elements of your finances that depend on how much you earn - such as pension contributions, maternity pay and more.
This is only likely to be a minor issue for most and easily overcome by the gain from vouchers, but is worth being aware of.
The impact on childcare tax credits...
Though the name’s confusing, tax credits are simply a type of benefit you get put into your bank account.
Yet it can be a massive amount of cash, the average payout for those eligible is around £60 a week, that’s over £3,000 a year, so this isn’t small potatoes (see Childcare Tax Credits guide for whether you're eligible).
The problem is for a number of people with kids (depending on how many) getting childcare vouchers reduces your eligibility for tax credits; potentially leaving you out of pocket.
This is because the amount of tax credit you get depends on how much you pay IN CASH (ie not vouchers) for childcare. Here’s a simplified example...
The Jones are entitled to 70% of their childcare costs in tax credits.
Pay £100 in cash a week - they get £70 of tax credits.
Pay £50 in cash and £50 in vouchers (which they had to buy) and they’re only entitled to 70% of £50 paid in cash, which is £35 of tax credits.
The upshot of all this is a hit to tax credits by using childcare vouchers, which means some people are better off not getting vouchers at al.
Should you go for childcare vouchers or not?
If you're eligible for tax credits for childcare (see childcare tax credit guide if you're not sure) then you're likely to be better off sticking with ONLY tax credits and not getting vouchers.
There are a few circumstnaces in which you could still gain getting vouchers, for example if your childcare costs are above £175 a week for one child or £300 for two or more children.
If you can't claim tax credits then you will ALWAYS be better off using vouchers to pay for childcare, as you have no tax credits to be affected.
Use the special childcare voucher calculator. There's a special calculator on the HM Revenue & Customs which will calculate if you're better or worse off taking the vouchers.