Low and middle-income parents will be offered free childcare places for two-year-olds under new Government proposals.

However, in return, Westminster will axe the tax-breaks given to mothers and fathers who use childcare vouchers, which can net savings of up to £2,400 (see the Childcare Vouchers guide).

Under the plans, announced in Prime Minister Gordon Brown's speech to the Labour Party conference this week, 250,000 free childcare places will be made available, covering 40% of two-year-olds.

Full details of exactly who is eligible and when the scheme will get underway will be announced in the Chancellor's Pre-Budget report, due in the next few weeks.

Vouchers phased out

The flipside of this move is the end of the tax breaks given to those who use childcare vouchers in April 2015. To continue getting those benefits until then you must start collecting vouchers by April 2011, or you'll be ineligible.

Childcare vouchers are employer-provided coupons you can use to pay for childcare. The value of your vouchers is deducted from your official salary so no tax or National Insurance is taken from that sum, which creates the saving.

The axing of vouchers' benefits will hurt parents on higher incomes most. Not only will they not be entitled to the new free childcare places but higher rate taxpayers get greater tax breaks from childcare vouchers.

A couple who pay both higher rate tax could be up to £2,392 a year better off using vouchers, compared to £1,808 if you're a basic rate payer.

Vouchers will still be available in future but without the tax breaks.

An HMRC spokesman says: "We need to take tough choices at this time, to focus resources where they are most needed – helping disadvantaged young children access high-quality care that promotes child development.

"Low and middle-income working parents will continue to benefit from childcare support through tax credits that is much more generous than tax relief on vouchers."

Further reading/Key links

Cut childcare costs: Childcare Vouchers
Benefits check-up: Benefits Check-up