Childcare Vouchers

Cut childcare costs by £1,000/year

Many parents can save £100s a year using childcare vouchers. They allow you to pay for childcare from your PRE-TAX salary – but act FAST if you want them. While voucher schemes are available to new entrants until 4 October 2018, many will need to apply by the end of August.

It may not seem a huge amount, but the impact can be huge. If you're not taking advantage, check to see if it's worth signing up – the Government scheme was meant to close to new applicants in April but was extended for six months, so there are still a few weeks left...

In this guide

How do childcare vouchers work?

Childcare vouchers can save many parents with kids aged up to 15 £100s a year on childcare. Frustratingly, they're only available via employers, but many large and small companies take part.

The key is they allow you to pay for childcare out of your PRE-TAX income – meaning you save on tax AND national insurance. While this doesn't sound much, it can be worth £100s, and every little helps.

Childcare vouchers scheme closing – so act NOW

MPs voted in March to extend the childcare vouchers scheme deadline, meaning it'll now close to new applicants on 4 October 2018.

However, many will have to act by the end of August, as it can take time to sign up. You must have received your first childcare vouchers by the deadline, and many employers will require a month's notice to start the deductions from your payslip, so contact your payroll department ASAP to get the ball rolling.

The scheme's closing because the Government has rolled out the Tax-Free Childcare (TFC) scheme to replace childcare vouchers. If you're not signed up to either, compare which is best for you.

So how do childcare vouchers work?

The scheme works by 'salary sacrifice'. A few generous employers will 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 the Computershare Voucher Services or KiddiVouchers websites. 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 buy £55 worth of childcare vouchers a week (approx £243/month). This is PER PARENT, so two working parents could get £110 of vouchers a week (£486/mth).

If you're a higher or top-rate taxpayer, and you joined a childcare voucher scheme before 5 April 2011, you'll also be able to buy this amount, though if you joined after, you'll be able to buy a lower value of vouchers. This is to even out the maximum tax saving that can be made. The limits in terms of vouchers you can buy are:

  • Basic-rate (20%) taxpayer: £55/week voucher, max annual tax/NI saving £933

  • Higher-rate (40%) taxpayer: £28/week voucher, max annual tax/NI saving £625

  • Top-rate (45%) taxpayer: £25/week voucher, max annual tax/NI saving £623

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'll have to pay the nursery, school or 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

  • 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 NI 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).

What counts as childcare?

The vouchers cover childcare up to the 1 September after your child's 15th birthday (16th if they're disabled).

The provider must be regulated. They can be used 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 tuition. However, the tutor/institution must again be Ofsted registered and also happy to accept vouchers, so check first.

The easiest way is simply to 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 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 can I get vouchers from?

Any parent, or those with parental responsibility for a child living with them, is eligible for childcare 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.

    You MUST have received your first voucher by 11.59pm on 4 October 2018 to qualify. As it can take some time for payroll to process the request, it's best to speak to your payroll department as soon as possible - some employees have been told to apply by as early as late August.

  • What if your employer doesn't offer a scheme?

    As the October deadline looms closer, the chance of employers setting up the scheme now seems unlikely, so there may not be much you can do if you're not already offered them. If you still want to give it a go, here's what you need to know...

    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 a work scheme?

    You can only get childcare vouchers if you've parental responsibility for a child (you 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 or her employer's scheme and buy the vouchers off him or her. 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 that's 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 our 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. If they paid £100 in cash a week, they'd get £70 of tax credits. But if they paid £50 in cash and £50 in vouchers (which they had to buy), they're only entitled to 70% of £50 paid in cash: £35 of tax credits.

In the first scenario, they meet only £30 of the total childcare costs from their own pocket. In the second, they've had to buy the childcare voucher (which would have cost them about £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 more on tax credits if you're not sure), 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, you'll ALWAYS be better off using vouchers to pay for childcare.

Use the special childcare voucher calculator. There's a calculator on Gov.uk which will work out 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?

After 4 October 2018, no new applicants will be able to join the childcare vouchers scheme. If you're already a member, though, you'll 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, launched in April 2017, which 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. Some families will win under the scheme; 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:

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 are 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 on childcare across the MONTH for after-school clubs and pick-ups.

If both are basic-rate taxpayers using vouchers, this would cost them £347 – a saving of £152 compared with not using them. But if they used the new TFC scheme, it'd cost them £400 – £53 more expensive than vouchers.

If both are higher-rate taxpayers using vouchers, this would cost them £398 – a saving of £102 compared with not using them. And if they used TFC, it'd cost them £400 – £2 more expensive than vouchers.

Example 2. High childcare user

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

If both are basic-rate taxpayers using vouchers, this would cost them £1,847 – a saving of £153 compared with not using them. But if they used the new TFC scheme, it'd cost them £1,668 – £179 cheaper than vouchers.

If both are higher-rate taxpayers using vouchers, this would cost them £1,897 – a saving of £103 compared with not using them. And if they used TFC, it'd cost them £1,668 – £229 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...

  • TABLE_CELL_STYLE CHILDCARE VOUCHERS – THE MAXIMUM TAX & NI SAVING YOU CAN MAKE (1) TAX-FREE CHILDCARE – THE MAXIMUM THE GOVERNMENT WILL CONTRIBUTE
    TABLE_CELL_STYLE Assumes you signed up after April 2011 One child Two children (2)
    CIRCUMSTANCE: 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 £623 None None
    SINGLE, SELF-EMPLOYED PARENT
    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: 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 £623 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 £623 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, about £13,650 for 35 hours a week if you're over 21. (4) You need to be working, which is classed as earning at least £115/week. (5) Assumes earning less than the £100,000 threshold.

    Table uses 2018/19 income tax thresholds: No tax under £11,850. Basic: £11,850 to £46,350. Higher: £46,350 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 has produced a Tax-Free Childcare Calculator to help you work out which scheme works better for you. Do note that it requires some personal information.

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 4 October 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, 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 as well for you as childcare vouchers, but you're not yet signed up, you need to do this by 4 October 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, you could try to persuade it to start offering it, but you need to act quick.

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, you can continue claiming them until your employer stops offering them, or you change jobs.

The Government's Childcare Choices website allows you to apply for the scheme, but it's staggered the sign-up process. See our Tax-Free Childcare guide for more info.

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

I'm not signed up to any scheme

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

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