Parents of young children were today celebrating a Government U-turn which preserved tax relief on childcare vouchers.

Gordon Brown last night gave in to pressure from Labour backbenchers and announced he was ditching his plan to scrap the relief, currently worth up to £2,392 to 340,000 families using Ofsted-approved nurseries across the UK (see the Childcare Vouchers guide).

Instead, the relief will be applied to all vouchers at the standard income tax rate of 20%, at a cost of hundreds of pounds a year to parents earning more than £43,000, who currently receive relief at the higher rate of 40%.

You also get relief on National Insurance contributions but the Government has yet to confirm exactly how this will work in the long run.

The change of heart was welcomed by childcare campaigners but sparked Conservative allegations that the Government's policy was "in chaos".

Parents currently using the vouchers will not be affected by the change, which applies to new entrants to the scheme from 2011.

Backbench backlash

Brown announced he was scrapping the relief at Labour's annual conference in September, to fund free nursery places for two-year-olds. He argued the wealthiest 6% of voucher users gained 33% of the benefits from the tax relief.

But he faced a backlash from Labour backbenchers, including former ministers Patricia Hewitt, Estelle Morris and Caroline Flint who challenged him in a joint letter.

More than 92,000 people signed a petition on the 10 Downing Street website and a parliamentary motion defending the vouchers was backed by 88 MPs, including 50 Labour backbenchers, enough to threaten Brown's majority in the Commons.

Last night, Brown wrote to the rebellion's leaders, Labour MPs Roberta Blackman-Woods and Fiona Mactaggart: "Following our discussions I can now... say that we will retain tax relief for new childcare vouchers issued in the future.

"However, there still remains a concern that a disproportionate benefit is accruing to higher rate taxpayers. So to ensure this tax relief is given on a fairer basis to all families, we will ensure all taxpayers get the same income tax relief as basic rate taxpayers do currently."

Aides said Mr Brown had always been "in listening mode" on the issue, but acknowledged the move will mean he can no longer achieve his ambition of creating 250,000 free nursery places for two-year-olds by 2015. These will now be introduced at a slower rate.

Ms Hewitt said she was "delighted" by the concession.

"Childcare vouchers, with tax relief, give essential help to over a third of a million families and it would have been quite wrong to withdraw this help," said the former Health Secretary.

The Save Childcare Vouchers Campaign also welcomed the move, which they calculated would mean parents will still receive savings of around £900 a year, or £1,800 where both are claiming. Some 92% of voucher users are standard rate taxpayers whose entitlements will not change, said the campaign.

How vouchers work

Parents can "sacrifice" up to £243 of their income each month in return for childcare vouchers which are not liable for income tax or 11% National Insurance.

This effectively translates into a 31% tax break on the money for standard-rate taxpayers and 41% for most paying the higher rate at present. Both parents can claim if their employers run a voucher scheme.

Sarah Jackson, chief executive of the organisation Working Families, welcomed the U-turn.

"This is no time to be withdrawing any support for parents in work, and vouchers can make all the difference to parents struggling to make work pay," she said.

But Conservatives said the Government had shown "neither consistency nor honesty" on childcare.

"Despite the rhetoric about being family friendly, all we seem to get in practice is underfunded policies and U-turns," said Tory family spokeswoman Maria Miller.

The Government is still to confirm further details such as what happens to voucher users who switch jobs.

Further reading/Key links

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