Childcare Vouchers

Childcare vouchers can save parents £1,000s a year, the problem is not enough people know about them. They're operated through employers and allow you to pay for childcare from your pre-tax salary. This mightn't sound a big deal, but the impact can be huge.

• Childcare vouchers basics
• What counts as childcare?
• Where you get them
• How they work
• Warning! It can hurt your tax credits
• Related Articles/Discuss

Always first check if you're entitled to
Childcare tax credits

Buried treasure is just child's play

Childcare vouchers in a nutshell

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. It needs to be offered 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. 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.

What counts as childcare?

The vouchers cover childcare up to 1 September after your child's 15th birthday (16th if they are disabled), and they are usable by any nursery, playgroup, nanny, childminder or au pair who is registered and regulated by Ofsted.

If you ask, most providers will simply tell you if they're registered, but there is an official way to check:

• In England. Go to the Ofsted website or call 0845 601 4771


• In Wales. Go to the Care Standards Inspectorate


• In Scotland. Go to the Care Commission


• In Northern Ireland. Contact your local Health and Social Services Trust via the DHSSPS website.

Alternatively go to ChildcareLink where you can find local registered childcare.

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 at least 12.5 hours a week (some Local Authorities offer 15 hours a week, and it will be 15 hours across England by 2010) free childcare for all three and four year olds for up to two years before they reach school starting age (term time only). Read the Childcare Costs guide for more info.

Where do you get the 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. Therefore 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. Until 2006 teachers weren't allowed to use the vouchers, but thankfully that's now changed. 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 money - £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.

  These providers include: Kiddivouchers (which donates at least 5% of all profits to various charities) and Employersforchildcare (a not for profit organisation). See a full list of providers.

  Many of these companies will also contact your employer for you upon request.

How the vouchers work in practice

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' for the vouchers.

How does salary sacrifice work?

You give up some of your salary in exchange for the same value in vouchers. Yet the tax and national insurance relief means for every £100 a basic rate taxpayer loses from their pay packet, they get around £130 worth of vouchers back (and higher rate taxpayers get even more).

Savings are substantial, around 31% for basic rate tax payers or 41% for higher rate tax payers up to the limit of £243. For an accurate figure on how much you can save have a look at the savings calculators on Accor Services or Computershare Voucher Services.

How many vouchers can you buy?

If your employer offers a scheme, either itself or through one of the voucher providers, you can pay for up to £243 of childcare with it each month. Do note this is ‘per parent' so for two working parents you could get £486 a month of vouchers. Yet 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 in the near future get the maximum allowance now. 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.

Warning! Vouchers can hit your tax credits

Though the name’s confusing, tax credits are simply a payment you get into your bank account. Working families on incomes under roughly £40,000 can get these to help cover their childcare costs. The average payout is £68 a week or £3,500 a year, so this isn’t small potatos (see Childcare Tax Credits guide).

The problem is for a substantial number of people with kids (depending on how many) and family incomes below £42,000 a year, getting childcare vouchers reduces your eligibility for tax credits; overall leaving you out of pocket.

This happens primarily because the tax credits you get depend on the amount you pay out for childcare, yet paying in childcare vouchers doesn’t count towards that total.

Here’s a simplified example...

Imagine a working family were entitled to 80% of their childcare costs in tax credits (ie the govt. pays that into their bank account). So if they pay £100 a week in cash, they get £80 back.

Now imagine it still costs £100 but they pay £60 in childcare vouchers (which of course they had to buy). So now, unbeknownst to them they’re only entitled to 80% of the remaining £40, just £32 a week.

This means the net result of this scheme can be a massive loss.

What you should do?

Earn under £42,000? As a rough rule of thumb, if you've:

One child and a family income under £24,000

Two children and a family income under £30,000

Three kids and a family income under £36,000

Four (or more) children and a family income under £42,000

you're likely to be better off sticking with tax credits.

Don’t let this problem unnecessarily put you off. Follow the following steps if you are effected:

• Use the special calculator. There's a useful calculator on the HM Revenue & Customs which will calculate if you're better or worse off taking the vouchers.



• Check other benefits. You'll also need to check how it would affect your pension contributions and any other benefits you may be receiving such as Statutory Maternity Pay (find out more).

Frankly the situation is ridiculously confusing, therefore it's something we’ve lobbyed strongly about, read Martin’s blogs on Ed Balls' reply to my Childcare Agitation fears and Treasury meeting on childcare.

The savings are huge: a basic rate tax payer using the full allocation of childcare vouchers can save £75 per month. That's £900 over the course of a year. Higher rate taxpayers can save even more, and as it's calculated per adult, that means the biggest possible gain for a family is £2,392 a year! To find out how much you save there's a useful calculator at Accor Services.