Tax and your children Childcare costs
If you pay for childcare, you may be eligible for some tax and National Insurance exemptions.
If your employer provides a workplace nursery, you won't pay tax or National Insurance on any of the benefit.
If your employer offers childcare vouchers or otherwise helps with the cost of childcare and you are a basic rate taxpayer you won’t pay tax or National Insurance on the first £55 a week in 2013-2014.
The £55 limit applies regardless of how many children you have, but it does apply to both parents, so you could get up to £110 a week in all.
The childcare must be provided by an approved or registered person (such as a registered childminder), and the benefit must be available to all staff.
Higher-rate tax payers are restricted to £28 per week, Additional rate taxpayers to £25 per week.
If your employer provides childcare vouchers it may offer this through salary sacrifice in which case it will deduct the amount you wish to claim from your salary in exchange for the voucher which you give to your childcare provider.
If you claim the full amount and are a basic-rate taxpayer, you could save £900 a year. New higher-rate taxpayers are now (since 2011-12) restricted in how much they can get tax-free however. For 40% taxpayers is is £28 a week and for 45% taxpayers £25 a week.
New voucher scheme from Autumn 2015
In the 2013 Budget, Chancellor George Osborne announced a new system of childcare vouchers worth up to £1,200 a year for working parents. Details have yet to be announced but the new vouchers are expected to start in October 2015.
Watch out if you claim childcare through tax credits
If you are employed or work for yourself, you may also be able to claim the childcare element of the working tax credit (WTC).
However, you can’t claim for the cost of any childcare already covered by childcare vouchers, so they could affect your entitlement to the childcare element of WTC.
This means that even with the savings that vouchers give you, you may be better off claiming full childcare costs through tax credits instead of taking vouchers.
If you do take vouchers instead of tax credits, make sure you tell HMRC, otherwise any tax credits paid to you in respect of the childcare costs covered by the vouchers will be overpaid and have to be paid back.
Leaflets available from HMRC
- IR115 Childcare provided by employers
- WTC1 Child tax credit and working tax credit – an introduction
- WTC2 Child tax credit and working tax credit – a guide
- WTC5 Help with the costs of childcare
Chartered Institute of Taxation
Which? is grateful for assistance from the Chartered Institute of Taxation in compiling this guide. For details of the Institute and its work, see www.tax.org.uk