More than two million working families could receive support for childcare costs under a new scheme announced by the Government today, but will you be better or worse off? analyses what it means.

Under the Government's proposed Tax-Free Childcare initiative, eligible families will get 20% of their yearly childcare costs up to £6,000 per child, paid for by the Government. This could mean payments of up to £1,200 per child, per year.

The scheme, which is set to come into force in late 2015 after the next general election, will replace the existing childcare vouchers programme, which is offered by fewer than 5% of employers anyway (see our Childcare Vouchers guide).

Firstly, here's how the current and proposed schemes compare:

Childcare vouchers vs tax-free childcare scheme

  Current childcare vouchers scheme Proposed scheme
Official name Employer Supported Childcare. Tax-Free Childcare.
What do you get? Depending on salary and when you joined, EACH PARENT can buy a max £243 vouchers/ month from pre-tax and NI income. For a basic taxpayer, max annual gain is £930.

You will pay money to a childcare provider and for each 80p you give, the Government will add 20p, up to the annual £1,200 limit/ child.

Who qualifies? Only available from employers that choose to offer the scheme. Not for self-employed. Working single parents or couples (both must work) earning less than £150,000 each/ year. Includes self-employed but excludes those already getting tax credits, or universal credit when it comes into force.
What age can your child be? Up to the first Saturday following 1 September after child's 15th birthday (or 16th birthday if registered blind or getting Disability Living Allowance). For the first year, it's for children up to 5 and disabled children under the age of 17. This will build up "over time" to include children under 12.
When does it start? Already in place. It's proposed to start after next general election, in late 2015.
How many eligible? 450,000 currently claim. From Autumn 2015, 1.3m families, rising to about 2.5m (once age limit is increased).

Will the new scheme be better for me than childcare vouchers?

You’ll still be able to join the childcare vouchers scheme until Tax-Free Childcare is available. After that, it's likely existing members will be allowed to continue to use vouchers, or switch to the new scheme.

However, so far no decision has been announced on how long the voucher scheme will continue to run in parallel with Tax-Free Childcare. It's likely to depend on whether employers and voucher providers continue to offer it.

The Government says the new scheme will save a typical working family with two children under 12 up to £2,400 a year, yet we've worked out while some will benefit, others will lose out (see our Childcare Costs Help guide for further help on cutting childcare costs).

Below, we've analysed who would be better sticking with the existing childcare scheme, and who should move to the new one.

Key Always likely to be the best option Depends on no of kids and when started vouchers Never likely to be the best option
  Current childcare vouchers max gain Max you'll get from new scheme
Signed up pre-Apr 2011 Signed up post-Apr 2011 One child Two children Three children (1)
Single, employed parent
No income tax payable - - £1,200 (3) £2,400 (3) £3,600 (3)
Basic taxpayer £930 (2) £930 (2) £1,200 £2,400 £3,600
Higher taxpayer £1,225 £620 £1,200 £2,400 £3,600
Top taxpayer £1,515 £600 - - -
Single, self-employed parent
No income tax payable - - £1,200 (3) £2,400 (3) £3,600 (3)
Basic taxpayer - - £1,200 £2,400 £3,600
Higher taxpayer - - £1,200 £2,400 £3,600
Top taxpayer - - - - -
Couple, both employed and eligible for vouchers
No income tax payable - - £1,200 (3) £2,400 (3) £3,600 (3)
Basic taxpayer £1,860 (2) £1,860 (2) £1,200 £2,400 £3,600
Higher taxpayer £2,450 £1,246 £1,200 £2,400 £3,600
Top taxpayer £3,030 £1,200 - - -
Couple, one employed one self-employed
No income tax payable - - £1,200 (3) £2,400 (3) £3,600 (3)
Basic taxpayer £930 (2) £930 (2) £1,200 £2,400 £3,600
Higher taxpayer £1,225 £620 £1,200 £2,400 £3,600
Top taxpayer £1,515 £600 - - -
Couple, both self-employed
No income tax payable - - £1,200 (3) £2,400 (3) £3,600 (3)
Basic taxpayer - - £1,200 £2,400 £3,600
Higher taxpayer - - £1,200 £2,400 £3,600
Top taxpayer - - - - -
Couple, one employed one not working
No income tax payable - - - - -
Basic taxpayer £930 (2) £930 (2) - - -
Higher taxpayer £1,220 £620 - - -
Top taxpayer £1,515 £600 - - -

(1) Amount increases by £1,200 for each child, there is no maximum.

(2) You can only claim vouchers if you earn the national minimum wage, around £11,300 for 35 hours a week if you're over 21.

(3) Rules on what is "working" still being decided - figures above based on no minimum.

Figures are based on 2012/13 income tax thresholds: No tax under £8,105. Basic £8,105 to £42,475. Higher £42,475 to £150,000. Top over £150,000.

Amounts are a MAXIMUM annual gain based on salary sacrifice. Amounts may be lower.

How will the new scheme work?

Update: August 2013 The details below have been confirmed in the government's Tax-Free Childcare consultation.

It has also confirmed parents who are already members of the existing childcare voucher scheme at the time the Tax-Free Childcare starts will be able to continue using the voucher scheme.

Full details of Tax-Free Childcare will be set out following a consultation, but it's expected parents will be able to open an online voucher account with a voucher provider and have their payments topped up by the Government.

Parents will still be able to use the vouchers for any Ofsted-regulated childcare in England or the equivalent bodies in Scotland, Wales and Northern Ireland.

It should simplify the existing system, where you can claim both childcare vouchers and tax credits, but where getting vouchers may reduce your eligibility for tax credits, potentially leaving you out of pocket. creator Martin Lewis says: "This new scheme is likely to apply to far more people than ever before and therefore should be welcomed, especially by the self-employed who previously have been forgotten by the childcare voucher system. 

"Yet as always when these changes are made, where there are winners some lose out. The most prominent is a couple where only one works; they're not eligible under the new system but are under the old.

"So the real question is, how long will the Government allow the two schemes to run in parallel, as it's promised?"

'Boost to the pockets of hard-working families'

The Government also announced it plans to add an extra £200 million into the new universal credit system from April 2016 (see our Tax Credits guide).

It means families where both parents are paying income tax (which you'd pay if you earn £8,105 or more in the 2012/13 financial year), will get 85% of childcare costs covered, up from the current 70% covered under the tax credits system.

Prime Minister David Cameron says: "Too many families find paying for childcare tough and are often stopped from working the hours they'd like.

"This is a boost direct to the pockets of hard-working families in what will be one of the biggest measures ever introduced to help parents with childcare costs."

Additional reporting by Wendy Alcock.