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 PRE-TAX salary.
It might not sound big, but the impact can be huge. If you're not taking advantage, check them out urgently, as the current scheme changes in autumn 2015. The new one will be open to millions more people, but some families will better off sticking with the current one so it's vital you check it out NOW.
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 from April 2014 are:
Basic-rate (20%) taxpayer: £55/week voucher, max annual tax saving £930.
Higher-rate (40%) taxpayer: £28/week voucher, max annual tax saving £630.
Top-rate (45%) taxpayer: £25/week voucher, max annual tax 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.
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 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 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
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 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 reduces their costs significantly! So try to persuade them. You could chat to other parents and go as a group to request the facility, even printing out this guide to show them.
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 national insurance, 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.
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.
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.
This means using childcare vouchers can hit your tax credits, which means some people are better off not getting vouchers at all.
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?
A new scheme, called Tax-Free Childcare, will replace the existing voucher scheme in autumn 2015 (the exact date has not yet been confirmed). It will also be open to ALL qualifying parents, unlike under the current system, where childcare vouchers can only be bought by people whose employer offers the scheme.
The new scheme will be open to single parents/couples who work 8+ hours a week (including self-employed) and who pay for Ofsted-registered childcare for a child under the age of 12 (or 16 if the child is disabled).
Under it, eligible families will get 20% of their annual childcare costs paid for by the Government. 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).
Eligibility is similar to the current childcare tax credits scheme but there are annual income limits in the new scheme - from £2,420 up to £150,000 for a single parent, and from £4,840 up to £300,000 where both parents work.
Which scheme is best - the existing one or the new one?
Well, it depends. If you're already on the current scheme, you can stay on it until your child reaches 15, providing you don't move jobs - and for some, staying on the current scheme as long as possible will be the right choice. This also means that for some it may be worth signing up now so they can enjoy the current scheme (though you must be a parent to sign up).
As a general rule of thumb, most people will be better of under the new scheme apart from two exceptions - if you're a single parent and a top-rate taxpayer or if you're a couple where only one of you is working. We've done a brief analysis of the winners and losers when the schemes are compared.
New scheme definitely good for:
- Couples with two or more children, as the Tax-Free Childcare saving is per child.
- Couples where one or both parents are self-employed (as self-employed can't access childcare vouchers).
- Couples where both parents work, but who don't earn enough to pay any income tax (so earning less than £10,000 each)
New scheme definitely bad for:
- Couples where one parent doesn't work, as they're not eligible for Tax-Free Childcare.
- Additional-rate taxpayers, as anyone earning £150,000+ isn't eligible for the scheme.
There's one scenario where we don't know which scheme will win, and it's a one-child family where both parents are employed and eligible for vouchers. In this case, for higher and top rate taxpayers, which scheme is better will depend on when the parents first signed up to the childcare vouchers scheme. For the top-rate taxpayers, it will also depend on whether one or both parents are top rate payers. If so, their combined income will disqualify both them.
If the new scheme's definitely bad for you, see if you can start claiming childcare vouchers (or continue with the scheme if you're already on it). Your employer will need to offer the scheme, and you'll need to sign up to start receiving the vouchers. You must already have a child to start claiming, you can't claim for any potential future children.