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 for new applicants on 4 Oct, but if you were signed up before then, you can still use them, so we've left this guide as it was. As long as you're with the same employer, and it still offers them, you can continue to get childcare vouchers
If you missed the deadline, then Tax-Free Childcare might be a good alternative for you. And in some cases, it could beat childcare vouchers anyway.
In this guide
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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.
The childcare vouchers scheme closed to new applicants on 4 October 2018, which means that parents had to be signed up, and had received their first vouchers, by this date in order to be able to still use them.
We've kept this guide with information for those who are still claiming the vouchers.
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.
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.
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).
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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.
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:
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. 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?
If you were receiving childcare vouchers when the scheme closed on 4 October, you'll continue to receive them as long as you stay with the same employer, and your employer continues to offer them.
If you had not received your first vouchers by the deadline, you will NOT be able to get childcare vouchers. You may want to explore other help you can get with your costs in our Tax-Free Childcare or Childcare Costs guides, or by visiting Childcare Choices.
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
Tax credits are being replaced by universal credit. The roll-out is currently underway, and it will complete in late Dec 2018 for the whole of the UK. After this, you won't be able to make a new claim for working tax credits. You'll only be able to claim child tax credits if you've three or more children.
Whether you're eligible to apply still depends on where you live. Use the postcode checker to see if universal credit is now available in your area.
If you're signed up before the roll-out of universal credit is complete, you'll be able to continue to receive tax credits until you're moved as part of the 'managed migration', you report a chance of circumstance, or you have to make a new claim. Read more in our Universal Credit guide.
What are tax credits?
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 stay on childcare vouchers or not?
If you're still receiving childcare vouchers, you may be better off getting other types of help.
Use the special childcare 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 Tax-Free Childcare – so which is best?
The childcare vouchers scheme is now closed to new applicants. We've left this information 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.
If you're thinking of leaving the childcare vouchers scheme for the Tax-Free Childcare scheme, you should compare the two to see which is best for you - you won't be able to change your mind once you've switched.
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. 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:
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 wouldn't have been eligible for 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 and they were signed up to it before the deadline).
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.
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 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.
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.
I want to switch to the Tax-Free Childcare scheme
If you're getting vouchers and you 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 to sign up to Tax-Free Childcare. This needs to be done within three months.
I'm not signed up to any scheme
If you're working and claiming universal credit, you can claim back up to 85% of your childcare costs. The maximum amounts you can get are:
- £646 per month for one child.
- £1,108 per month for two or more children.
You must pay for the childcare upfront first and provide receipts in order to get money back. You can only claim for childcare that has taken place during your assessment period. For more information, see our Universal Credit guide.
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