The government’s childcare voucher scheme is due to close to new applicants on 4 October. After, parents will need to use the tax-free childcare scheme instead – but will you be better off?
To benefit from childcare vouchers, you have to apply through your employer if they offer the scheme – and you may have to act now in order for them to process your claim on time.
Which? explains how the childcare voucher scheme works, who it’s suitable for, and what the alternatives are if you need help paying for childcare.
What is the childcare voucher scheme?
The childcare vouchers scheme is offered through individual employers.
Employers aren’t obliged to offer the scheme, so you’ll have to check to see whether yours does.
Under the scheme, you opt to give up a portion of your wages before tax in exchange for childcare vouchers worth that amount.
The vouchers can only be spent with registered childcare providers – either a registered childminder, nursery or club, a childminder with an Ofsted-registered childminding agency, a registered school, or a home careworker working for a registered home care agency.
Because you ‘sacrifice’ part of your salary before National Insurance and income tax have been deducted, you essentially cover your childcare costs tax-free. What’s more, you’ll also pay less tax on the salary you receive as you’ll be receiving less money each month.
How much do childcare vouchers cover?
How much you get depends on how much income tax you pay. Basic-rate taxpayers can get £55 in vouchers per week, saving them up to £930 a year per parent on National Insurance and tax.
Higher-rate taxpayers can get £28 of vouchers per week, for a saving of £624 a year, while additional-rate payers can spend around £25 per week and save around £590.
There are some things to be mindful of when sacrificing your salary. A lower salary can affect entitlements such as maternity and paternity pay, as well as mortgage applications based on your income.
You should also check with your employer to make sure your bonuses, pay increase and pension benefits won’t be affected by taking a lower wage.
If you’re on a low salary, your take home salary is not allowed to fall below the national minimum wage, so this option may not work for you.
- Find out more: Salary sacrifice
Childcare vouchers vs tax-free childcare
Tax-free childcare was launched in April 2017, and will be the default replacement once the childcare vouchers scheme comes to an end.
There are a number of pros and cons compared with the childcare vouchers scheme – which option is best for you largely depends on your circumstances.
Tax-free childcare might suit you if:
- You’re self-employed and cannot get access to childcare vouchers.
- Your children are aged 11 and under – as children older than this are not eligible for tax-free childcare. You can, however, claim for disabled children under the age of 17.
- Both you and your partner, if you have one, are in work.
- You have high childcare costs.
- You have several children, as you could get up to £2,000 per child each year – this equates to 20% off childcare which costs up to £10,000 per child.
Tax-free childcare may not be the best option if:
- You need help to pay for childcare for foster children – foster children are not covered under tax-free childcare, but adopted children are.
- You claim tax credits or universal credit – you cannot claim any childcare element of these benefits at the same time as tax-free childcare. The same goes for childcare vouchers.
- You have a partner and only one of you is in work – both partners must earn a minimum of £120 per week, but no more than £100,000 a year – the exception to this earning limit is if you’re self-employed and started your business less than 12 months ago.
- Your children are aged between 11-15 – they would be eligible for childcare vouchers, but not tax-free childcare.
- You or your partner earn more than £100,000 – you cannot claim tax-free childcare, but could claim the additional-rate taxpayer level of childcare vouchers.
What if I already claim childcare vouchers?
If you already claim childcare vouchers, you can continue to do so as long as your employer keeps offering the scheme.
Once the date for new applications has passed, you’ll need to stay with the same employer and you won’t be permitted to take a career break of longer than a year in order to stay on the scheme – both of these would require making a new claim.
You don’t have to spend your childcare vouchers in the week or month that you receive them – they have a long expiry date, so you are able to save them to use later.
Some people, for example, will save the vouchers to use during school holidays when childcare can be more expensive.
If you have already switched to tax-free childcare, you will not be able to rejoin the childcare voucher scheme.
Other help with childcare
Depending on your circumstances, there is other help out there that could help cut your childcare costs.
Free childcare and education for two-year-olds
Some two-year-olds will be able to receive free early education and childcare from the term after their second birthday, for a full year.
The service is offered through your local council or childcare provider.
You may be eligible to get free education and childcare for your two-year-old if you already receive:
- Income support
- Income-based jobseeker’s allowance
- Income-related employment and support allowance
- Universal credit (if you and your partner have a combined income of less than £15,400 a year)
- Tax credits, with an annual income of less than £16,190
- The guaranteed element of state pension credit
- Support through part 6 of the Immigration and Asylum Act
- Working tax credit four-week run on (this is the payment you get when you stop qualifying for working tax credit).
The child’s circumstances can also mean they qualify for this service, if:
- They are looked after by the local council
- They have a current statement of special educational needs or an education, health and care plan
- They get disability living allowance
- They’ve left care under a special guardianship order, child arrangements order or adoption order.
This particular scheme is only available in England – Scotland, Wales and Northern Ireland operate different schemes.
Free childcare for three- and four-year-olds
All children aged three to four-years-old can get at least 570 free hours of childcare per year – usually taken as 15 hours a week for 38 weeks.
In some instances, this can be extended to 30 hours of free childcare a week.
You may be eligible for this if you and your partner, if you have one:
- Are both in work – or out of work but on parental leave, sick leave or annual leave
- Both earn at least the national minimum wage or living wage for 16 hours a week.
The earnings limit doesn’t apply if you’re self-employed hand started your business less than a year ago.
You can apply online, and the process should only take 20 minutes.
Working tax credits and universal credit – childcare element
If you’re eligible to receive working tax credits – or you’ve already been moved onto universal credit – you may be eligible to receive the childcare element these credits have to offer.
For working tax credit, you’ll get 70% of the cost of childcare, to a maximum of £175 if you have one child. If you have two or more children, you’ll get up to £300 a week – or 70% of the cost of childcare.
This is in addition to what you may receive in child tax credits.
If you’re on universal credit – the government’s latest benefit model that will eventually replace tax credits and a number of other benefits – you’ll receive 85% of childcare costs, up to a maximum of £646.35 per month for one child, or £1,108.04 for two or more children.
We’ve listed the maximum amounts you can receive – what you’ll actually get depends on your individual circumstances.
- Find out more: Working tax credits explained