If you pay for childcare, using childcare vouchers saves many parents £1,000s a year in tax. These vouchers - available via a special Government scheme and operated through employers - allow you to pay for childcare from your PRE-TAX salary.
It might not sound big, but the impact can be huge. If you're not taking advantage, check them out as a matter of urgency, as you could be paying more than you need to.
In this guide...
How childcare vouchers work
Childcare vouchers can save many parents with kids aged up to 15 over £1,000 a year on childcare. Frustratingly, they're 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, if you're on basic-rate tax, works something like this.
For more accurate savings figures, look at the 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 make sure you get your full salary back. We've never heard of this being a problem, but it's always worth checking.
How many vouchers can you buy?
Basic-rate taxpayers 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 of vouchers each month. (This also applies to 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.)
On 6 April 2011, new joiners paying higher or top-rate tax had their allowance cut so all taxpayers have roughly the same maximum tax saving. The limits in terms of vouchers you can buy are:
Basic-rate (20%) taxpayer: £55/week voucher, max annual tax/NI saving £930.
Higher-rate (40%) taxpayer: £28/week voucher, max annual tax/NI saving £630.
Top-rate (45%) taxpayer: £25/week voucher, max annual tax/NI saving £590.
The number of children you have doesn't affect this, so the limits are the same whether you've one child or an entire Brady Bunch. So, if you can't meet your entire childcare cost using the vouchers, you will have to pay the childminder directly for the rest.
Vouchers tend to last for a long time, so if you know you're going to have higher childcare costs during the holidays, collect vouchers in advance. Beware! Vouchers are usually non-refundable, so don't collect more than you can use.
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 counts as childcare?
The vouchers cover childcare up to 1 September after your child's 15th birthday (their 16th birthday if they are disabled).
The provider must be regulated. They're usable by any nursery, playgroup, nanny, childminder or au pair who is Ofsted registered - 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 again be Ofsted registered and also happy to accept vouchers, so check first.
The easiest way is to simply ask them, but you can also do a wider search by asking your local authority’s children’s services department.
Or search for your nearest Family Information Service on the Family & Childcare Trust website, which should be able to tell you about what's available in your area.
Plus you can check on these official websites:
Go to the Ofsted website or call 0300 123 1231
Check the Care and Social Services Inspectorate website or call 0300 7900 126.
Go to the Care Inspectorate website or call 0845 600 9527
In Northern Ireland.
Check the Department 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 at least 15 hours' free childcare each week (to be spread over at least three days) for all three and four-year-olds before they reach school starting age (term-time only).
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 or personnel department to see if yours does. Most big employers, including Lloyds, Barclays and Sony, offer the schemes. Many NHS trusts and Ministry of Defence departments do too while teachers can also use the scheme. If you're self-employed as 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 (NI) on the portion of tax you use for vouchers, it actually reduces their costs significantly! So try to persuade them. You could chat to other parents and go as a group to request the facility.
Firms can offer voucher schemes in 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 NI, so they'll still profit.
Can my childless friend get vouchers for me through his work scheme?
You can only get childcare vouchers if you've parental responsibility for a child (you either need to be a parent or guardian). You'll sign a declaration you understand this when you apply for the childcare vouchers scheme.
So you're not allowed to get your childless friend to enter his employer's scheme and buy the vouchers off him. It breaches the voucher scheme's terms and conditions, and HMRC regards it as potential tax evasion.
Working tax credit for childcare: how do vouchers affect it?
While many people can save by using vouchers, they do come with two warnings - they may reduce your pay and could also affect certain benefits.
Technically you earn less
If you need to sacrifice some of your salary to get vouchers, 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 it's worth being aware of.
Vouchers may affect how much tax credit you can claim
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 is about £60 a week - over £3,000 a year, so this isn’t small potatoes (see Childcare Costs guide for more).
But 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 Joneses 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.
In the first scenario, they meet only £30 of the total childcare costs from their own pocket. But in the second scenario, they've had to buy the childcare voucher (which would have cost them around £35 - the rest is tax/NI savings) plus they'd pay £15 of the rest of the costs, £50 in total. So, in this scenario, the Joneses would have been better off not using the vouchers.
Should I go for childcare vouchers or not?
If you're eligible for the Childcare Element of Working Tax Credit (to give it its full name, see the 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 circumstances 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'll ALWAYS be better off using vouchers to pay for childcare.
Use the special childcare voucher calculator. There's a special calculator on the HM Revenue & Customs site which will calculate if you're better or worse off taking the vouchers.
Warning! Childcare voucher scheme will end in 2017
From early 2017, no new entrants will be able to join the childcare vouchers scheme. If you're already a member, though, you will be able to continue for as long as your employer runs the scheme, or as long as you stay with your employer.
And while this won't be a problem for many as a similar scheme, called Tax-Free Childcare, will replace the voucher scheme, SOME families who are eligible for vouchers, but aren't eligible for the new scheme will lose out massively.
This new scheme was due to launch in autumn 2015, but was delayed by a legal challenge from two childcare voucher providers into the validity of the scheme. The Government was unable to work on the finer detail of the scheme while the court case was ongoing, hence the lengthy delay to the scheme launch.
You can read more about the delay in the Tax-Free Childcare scheme delayed until 2017 news story.
The new scheme: what is Tax-Free Childcare?
Under the new scheme, eligible families will get 20% of their annual childcare costs paid for by the Government. The way it works is that for every 80p you pay into a newly-created Childcare Account, the Government will contribute 20p. This could mean up to £2,000 per child (the scheme assumes a maximum of £10,000 per year childcare costs per child. If you pay more, you won't get more help).
The new scheme will be open to single parents/couples who work eight or more hours a week, including self-employed, and who pay for Ofsted-registered childcare for a child under the age of 12, or under 17 if the child is disabled.
It will also be open to ALL qualifying parents, unlike childcare vouchers which can only be bought by people whose employer offers the scheme. You can't enrol yet, though.
To be eligible for Tax-Free Childcare, you will need to:
- Have one or more child aged under 12 when the scheme starts in 2017.
- Be working - this means both of you if you're in a couple.
- Earn between £2,420 to £150,000 a year. This applies to both of you if you're in a couple (so if one earns more than £150,000, then as a couple, you can't access Tax-Free Childcare).
- Not be claiming tax credits (this includes the childcare element of Working Tax Credit) or universal credit.
Which scheme will be better for you - childcare vouchers or Tax-Free Childcare?
Well, a lot depends on how much you earn, how much tax you pay, and how much you pay for childcare. In this section, we assume your employer has a childcare vouchers scheme that you're eligible to join, so you have a choice between schemes. Here are the winners and losers for each scheme:
Tax-Free Childcare wins for:
- Self-employed people or couples who earn less than £150,000, as they're eligible for Tax-Free Childcare, but can't get childcare vouchers.
- Parents with more than one child and high childcare costs, as the help available goes up with the number of children. There's a limit for childcare vouchers which isn't dependent on the number of children.
Childcare vouchers win for:
- Couples where one parent doesn't work, as they're not eligible for Tax-Free Childcare, but the employed parent is eligible for vouchers (provided their employer offers a scheme).
- Basic-rate taxpayer parents with total childcare costs of £9,336 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare.
- Higher-rate taxpayer parents with total childcare costs of £6,252 or less. Under this amount, the saving you make with childcare vouchers exceeds the saving you can make with Tax-Free Childcare.
- Additional-rate taxpayers, as anyone earning £150,000+ isn't eligible for the scheme, whereas additional-rate taxpayers can get childcare vouchers.
We've produced a table looking at different family circumstances to see which scheme is the winner. We've examined savings at a level of £10,000 childcare costs per child, and assessed who'd win and under which scheme...
Childcare vouchers vs Tax-Free Childcare - how much can you save? (assumes £10,000 childcare costs per child)
|Childcare vouchers - the maximum tax & NI saving you can make (1)||Tax-Free Childcare - the maximum the Government will contribute|
|Assumes you signed up after April 2011||One child||Two children (2)|
|Single, employed parent|
|No income tax payable||None||£2,000 (4)||£4,000 (4)|
|Basic-rate taxpayer||£933 (3)||£2,000||£4,000|
|Single, self-employed parent|
|No income tax payable||None||£2,000 (4)||£4,000 (4)|
|Couple: Both employed and eligible for vouchers|
|No income tax payable||None||£1,200 (4)||£2,400 (4)|
|Basic-rate taxpayer||£1,866 (3)||£2,000||£4,000|
|Couple: One employed, one self-employed|
|No income tax payable||None||£1,200 (4)||£2,400 (4)|
|Basic-rate taxpayer||£930 (3)||£1,200||£2,400|
|Couple: Both self-employed|
|No income tax payable||None||£2,000 (4)||£4,000 (4)|
|Couple: One employed, one not working|
|No income tax payable||None||None||None|
|Basic-rate taxpayer||£933 (3)||None||None|
(1) The maximum saving doesn't change depending on the number of children you have. Amounts are a MAXIMUM annual gain based on salary sacrifice. (2) Amount increases by £2,000 for each child, there is no maximum. (3) You can only claim vouchers if you earn the national minimum wage, around £11,485 for 35 hours a week if you're over 21. (4) You need to be working, which is classed as earning at least £50/week.
Table uses 2015/16 income tax thresholds: No tax under £10,600. Basic £10,000 to £42,385. Higher £42,385 to £150,000. Top over £150,000.
If your childcare costs are lower than our worked example of £10,000 per child, or you want a personalised assessment, KiddiVouchers (a company providing childcare vouchers) has produced a Tax Free Childcare Calculator to help you work out which scheme works better for you.
What to do if childcare vouchers are better for you
What to do depends on whether you're already signed up, or you're only planning to sign up. If already signed up, you don't need to do anything, but if you're not yet signed up, you need to act before the scheme's replaced in 2017, or you could miss out.
I'm already signed up to get childcare vouchers
If you're already signed up to the childcare vouchers scheme with your employer, then you can continue claiming them until your employer stops offering them or you change jobs - it doesn't matter if this is before 2017 or after.
I'm not yet signed up
If Tax-Free Childcare won't work out as well for you as childcare vouchers, but you're not yet signed up, then you need to do this by early 2017 or you'll miss the boat. However, this may be easier said than done - your employer will need to offer the scheme, plus you must already have a child to start claiming.
If your employer doesn't offer the scheme, then you could try to persuade it to start offering it, but given there's less than two years to run, your employer may not regard it as worth the effort to make the change to the payroll.
If this is the case, you'll just need to pay for childcare entirely yourself until tax-free childcare launches in 2017 (though check if you're eligible to claim childcare tax credits to help).