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Childcare Vouchers

Cut childcare costs by £1,000/year

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Helen S and Wendy

Updated March 2017

If you pay for childcare, using childcare vouchers saves many parents £1,000s a year. 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 urgently to see if it's worth signing up - schemes close to new applicants in April 2018 because of the new Government-backed Tax-Free Childcare scheme.

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.

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.

Quick question

Is there any way of getting a refund for unused childcare vouchers?

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:

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! 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.

    Providers include Kiddivouchers (which donates at least 5% of all profits to various charities) and Employers For Childcare (a not-for-profit organisation). See a full list of providers.

    Many of these companies will also contact your employer if you ask them to.

  • 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 element of working 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.

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 Gov.UK site which will calculate if you're better or worse off taking the vouchers.

You can't have vouchers and sign up to the new Tax-Free Childcare - so which is best?

Child with piggy bankFrom April 2018, no new applicants 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.

It's going to be replaced by the new Tax-Free Childcare scheme which is launching in April 2017, which'll give eligible families an extra 20% towards childcare costs.

In total you'll be able to use this new scheme to pay for childcare of up to £10,000 per child each year – so you could get an extra £2,000 per child (up to £4,000 if your child is disabled) each year.

Read our full Tax-Free Childcare guide for the full details.

Be warned though: the new scheme won't be favourable for everyone. Some families will win under the new scheme while others will lose. A lot depends on how much you earn, how much tax you pay, and how much you pay for childcare. Here's our handy infographic to help determine which scheme is best for you:

IMAGE ALT

So who are the winners and losers under each scheme?

See where you fall under the new scheme:

Tax-Free Childcare wins for:

  • Self-employed people or couples who earn less than £100,000 each, 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.
  • Higher earners, as anyone earning £100,000+ (or in a couple where one earns £100,000+) isn't eligible for the scheme, whereas these high earners can get Childcare Vouchers.

Here's a couple of quick examples to see how it could work in practice...

Example 1. Low childcare user

Olly Onechild and his wife spend £500 of childcare across the MONTH for after-school clubs and pick ups.

If both are basic-rate taxpayers using vouchers, this would cost them £344 – a saving of £156 compared to not using them.But if they used the new TFC scheme, it’d cost them £400 – £56 more expensive than vouchers.

If both are higher-rate taxpayers using vouchers, this would cost them £396 – a saving of £104 compared to not using them. And if they used the new TFC scheme, it’d cost them £400 – £4 more expensive than vouchers.

Example 2. High childcare user

Molly Muchcare and her wife have two toddlers and spend £2,000 of childcare (in total for both toddlers) across the MONTH for nursery and pick ups etc.

If both are basic-rate taxpayers using vouchers, this would cost them £1,844 – a saving of £156 compared to not using them. But if they used the new TFC scheme, it’d cost them £1,668 – £176 cheaper than vouchers.

If both are higher-rate taxpayers using vouchers, this would cost them £1,896 – a saving of £104 compared to not using them. And if they used the new TFC scheme, it’d cost them £1,668 – £228 cheaper than vouchers.

If you want to break this down even further 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 per year, and assessed who'd win and under which scheme...

Childcare Vouchers vs Tax-Free Childcare - how much can you save?

What to do if Childcare Vouchers are better for you

If you're already signed up, you don't need to do anything, but if you're not yet signed up, you need to act before April 2018, 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.

I'm not signed up to any scheme

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 April 2018 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..

What to do if Tax-Free Childcare is better for you

What to do depends on whether you're already signed up to childcare vouchers, or you're only planning to sign up.

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.

HM Revenue & Customs has told us when Tax-Free Childcare commences, parents wishing to move from childcare vouchers to Tax-Free Childcare can apply for the new scheme.

After applying for Tax-Free Childcare you'll then need to give your employer written notice that you want to permanently leave their voucher scheme to sign up to Tax-Free Childcare.  This needs to be done within 3 months.

I'm not signed up to any scheme

It'll simply be a case of making sure you sign up to the new Tax-Free Childcare scheme.

It's worth noting that it'll only be available to parents of the youngest children from April 2017 and parents of other children later in the year, so if you'll be paying for childcare before the new scheme is available to you then you may wish to consider Childcare Vouchers in the interim.

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For all the latest deals, guides and loopholes - join the 12m who get it. Don't miss out