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Childcare Vouchers

Cut childcare costs by £1,000/year

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 might not sound big, but the impact can be huge.

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 might not 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, 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.

You give up £1,000 of salary... ...but after tax & NI that's only worth £700ish in your pocket. In return, you get £1,000 of vouchers... ...so you're £300 better off.

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.)

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 registered and regulated - most are.

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:

Childcare tax credit: 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.

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 is about £60 a week - over £3,000 a year, so this isn’t small potatoes (see Childcare Tax Credits guide for whether you're eligible).

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.

Should you go for childcare vouchers or not?

If you're eligible for tax credits for childcare (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.

How will childcare vouchers change in 2015?

Childcare building blocksA new scheme, Tax-Free Childcare, will replace the existing voucher scheme in autumn 2015. If you're already on the current scheme, you can stay on it until your child reaches 15 (providing you don't move jobs). But, unlike childcare vouchers, it will be open to all qualifying parents, not just people whose employer offers the scheme.