Cut childcare costs by £1,000/year
Many parents can save £100s a year using Childcare Vouchers, which allow you to pay for childcare from your PRE-TAX salary. The scheme closed to new applicants in October 2018, but you can still use them if you signed up before then, and are with the same employer (and the employer still offers them). If not, Tax-Free Childcare might be a good alternative – and in some cases will be a better option than Childcare Vouchers anyway.
How do Childcare Vouchers work?
The Childcare Vouchers scheme closed to new applicants on 4 October 2018, which means that parents had to have been signed up by this date to be able to still use them. We've kept this guide with information for those who are still claiming the vouchers (If you're not already signed up to the childcare vouchers scheme, check out our full Help with childcare costs guide to see what options are available for you).
Childcare Vouchers can save many parents with kids aged up to 15 money on childcare.
They allow you to pay for childcare out of your PRE-TAX income – so you save on tax AND national insurance. While this doesn't sound much, it can be worth £100s each year.
While a few generous employers will give you the vouchers on top of your normal salary, 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 & national insurance that's only worth £700ish in your pocket. In return, you get £1,000 of vouchers... so you're £300 better off.
If you're on a low income you should always check if you're eligible for childcare help from universal credit before you commit to only using vouchers, as it could save you more. We go into more detail on that below.
Of course, once you no longer need to pay for childcare, you can return to getting your full salary - usually this is simply a case of talking to the HR or payroll department at your workplace.
Basic-rate taxpayers can buy up to £55 worth of childcare vouchers a week (around £243/month). This is PER PARENT, so two working parents whose employers both offer vouchers could get £110-worth a week (£486/month). Top-rate tax payers can buy £28/week (or £56/week if two parents use the scheme).
The number of children you have doesn't affect this, so if you can't meet your entire childcare cost using the vouchers, you'll have to pay the childcare provider 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 it can be worth collecting vouchers in advance. But, beware – vouchers are usually non-refundable, so be careful not to collect more than you can use.
It's at your employer's discretion, as there's no official refund system. If allowed, refunds will have tax and national insurance deducted as they're treated like wages. You wouldn't have paid tax or national insurance when you first got the vouchers, because that's the perk of taking them.
Bear in mind you may be able to save the vouchers and use them in future as they don't expire until the September after your youngest child's 15th birthday (16th if your child's disabled), and can be used for things like tuition and summer holiday camps, as well as childminders or wraparound care.
What counts as childcare?
The vouchers cover childcare up to the 1 September after your child's 15th birthday (16th if they're disabled). This includes a wide variety of types of 'childcare', as long as they meet the following criteria:
- The provider is regulated. Vouchers can be used with any provider who's registered to provide childcare (with Ofsted for example). In England alone, there are currently around 68,000 providers regulated by Ofsted.
- The provider accepts Childcare Vouchers. Childcare providers don't have to accept vouchers as a form of payment, even if they're registered.
The easiest way is simply to ask them if they are registered, but you can also do a wider search by asking your local authority's children's services department. You can also 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 these official websites:
In England: Go to the Ofsted website or call 0300 123 1231
In Wales: Check the Care Inspectorate Wales website or call 0300 7900 126
In Scotland: Go to the Care Inspectorate Scotland website or call 0345 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. However 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 universal credit, 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).
Are vouchers still your best choice?
While many people can save by using vouchers, they do come with two warnings: they reduce your pay and, they may not be the most cost effective scheme for you.
Technically you'll earn less
This may sound obvious: you'll be sacrificing part of your salary to buy childcare vouchers. This can have a knock-on 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 people and often the gain from the vouchers easily outweighs the loss elsewhere – but it's worth being aware of.
Universal credit (or tax credits) usually work out better than childcare vouchers
Although you can use the childcare voucher scheme if you're on universal credit (or tax credits), for many people, claiming back childcare costs through your benefits actually works out better.
- On universal credit (UC), if you (and your partner, if you have one) are in work, you can reclaim up to 85% of your childcare costs, up to a maximum of £646 a month for one child, and £1,108 for two or more children, for children up to the age of 16.
- On tax credits, you can reclaim up to 70% of your childcare costs, up to £122.50 a week for one child, or £210 for two or more.
This means that, even though you pay less tax and national insurance with childcare vouchers, you're still likely to save more money if you claim your childcare costs through your benefits.
While there's nothing stopping you from claiming childcare vouchers AND using universal credit (or tax credits) to help with your childcare costs, this generally only works out better if your total childcare costs are significantly higher than the max amount you can claim through UC.
This is because you'll have to take off any amount you use in vouchers from the amount you're claiming from UC. For example, if your childcare costs are £500, and you get £230 in vouchers from your employer, you'll only be any to claim 85% of the remaining £270 from universal credit.
We cover reclaiming childcare costs through universal credit and tax credit in full in our Childcare Costs guide.
You can freeze your vouchers if you want to try out universal credit
Many voucher schemes will let you take a break for a short period of time – which can give you an opportunity to test out whether claiming childcare costs through universal credit works better for you.
Breaks can usually be taken for up to a year, but this varies from provider to provider, so check with them first. During this break period you'll remain eligible for the scheme – but if you decide not to buy any more vouchers after your provider's set period has ended, you'll lose access to the scheme.
Unfortunately, you CAN'T pause your childcare vouchers in order to try out the Tax Free Childcare scheme. If you apply to the Tax Free Childcare scheme, you'll no longer be eligible to buy childcare vouchers (but you will still be able to use up any that you have left).
You can't have vouchers and sign up to the Tax-Free Childcare – so which is best?
The Childcare Vouchers scheme is closed to new applicants, but we've left this information here for people who are still getting the vouchers and are considering switching to Tax-Free Childcare.
If you're already a member, you'll be able to continue for as long as your employer runs the scheme, or as long as you stay with your employer. But should you, or should you switch to Tax-Free Childcare?
The Tax-Free Childcare scheme launched in April 2017 and gives eligible families an extra 20% towards childcare costs. In total you'll be able to use this 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 and once you've decided to leave the Childcare Vouchers scheme, you won't be able to change your mind. Some families will be better off on Tax-Free Childcare, while others will save more with Childcare Vouchers. A lot depends on how much you earn, how much tax you pay, and how much you pay for childcare.
Here's our handy checklist to help determine which scheme is likely best for you:
Tax Free Childcare wins for...
|Parents with more than one child. The help available through Tax-Free Childcare increases with the number of children you have.|
|Parents with high childcare costs – usually over £9,500 a year.|
|People (or couples) who want to become self-employed. You'll be eligible for Tax-Free Childcare if you're self employed (as long as you earn less than £100,000 each).|
Childcare Vouchers win for...
|Couples where one parent doesn't work, or works less than 16 hours a week.|
|Basic-rate taxpayer parents with total childcare costs of £9,400 or less (or single parents with childcare costs under £5,000).|
|Higher-rate taxpayer parents with total childcare costs of £6,300 or less (or single parents with childcare costs under £3,000).|
|People earning £100,000+ a year (or in a couple where one earns £100,000+ a year), as there's no income limit with childcare vouchers.|
|Parents of older children. You can use the voucher scheme for childcare until your child turns 15.|
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 –MAXIMUM TAX & NI SAVING (1)
TAX-FREE CHILDCARE – MAXIMUM GOVERNMENT CONTRIBUTION
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 Higher-rate taxpayer £625 £2,000 £4,000 (5) Top-rate taxpayer £620 None None SINGLE, SELF-EMPLOYED PARENT No income tax payable None £2,000 (4) £4,000 (4) Basic-rate taxpayer None £2,000 (4) £4,000 (4) Higher-rate taxpayer None £2,000 £4,000 (5) Top-rate taxpayer
None None None COUPLE: BOTH EMPLOYED AND ELIGIBLE FOR VOUCHERS No income tax payable None £2,000 (4) £4,000 (4) Basic-rate taxpayer £1,866 (3) £2,000 £4,000 Higher-rate taxpayer £1,250 £2,000 £4,000 (5) Top-rate taxpayer £1,246 None None COUPLE: ONE EMPLOYED, ONE SELF-EMPLOYED No income tax payable None £2,000 (4) £4,000 (4) Basic-rate taxpayer £933 (3) £2,000 £4,000 Higher-rate taxpayer £625 £2,000 £4,000 (5) Top-rate taxpayer £620 None None COUPLE: BOTH SELF-EMPLOYED No income tax payable None £2,000 (4) £4,000 (4) Basic-rate taxpayer None £2,000 £4,000 Higher-rate taxpayer None £2,000 £4,000 (5) Top-rate taxpayer None None None COUPLE: ONE EMPLOYED, ONE NOT WORKING No income tax payable None None None Basic-rate taxpayer £933 (3) None None Higher-rate taxpayer £625 None None Top-rate taxpayer £620 None None
Table uses 2022/23 income tax thresholds. (1) The maximum saving doesn't change depending on the no. of children. 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, about £15,960 for 35hrs/week if you're over 23. (4) You need to be working,
and expect to earn at least £1,976 over the next three months. (5) Assumes earning less than £100,000 threshold.
Use the childcare calculator to check your exact circumstances
The table above gives you a rough indication of whether you're likely to better off on Tax-Free Childcare or Childcare Vouchers.
For a personalised assessment, use the Government's childcare calculator to see what help you're entitled to and how much you could get.
What to do if Childcare Vouchers are better for you
If you're already signed up, you don't need to do anything, you can continue claiming them until your employer stops offering them, or you change jobs.
What to do if Tax-Free Childcare is better for you
If you're getting vouchers and want to switch to Tax-Free Childcare, you'll need to give your employer written notice that you permanently want to leave its voucher scheme in order to sign up to Tax-Free Childcare. This needs to be done within three months.
Our Tax-Free Childcare guide contains more info on how the scheme works.
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