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Posted in: Finance Last updated: 06 Apr 2017

Childcare vouchers

Childcare vouchers can be used as an alternative way to pay for your registered childcare and are available to all eligible working parents whose employers are registered with a scheme. Vouchers allow you to pay your childcare provider from your pre-tax salary. Which means you don’t have to pay tax and National Insurance on that part of your salary.

From August 2018 the childcare voucher scheme will be closed to new applications as a new scheme called Tax-free childcare will be introduced - more on this further down.  The current voucher scheme won’t be stopped but will only stay live whilst either you stay with your existing employer or for as long as you remain in the scheme.

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How do they work?

There are two ways your employer could give you the childcare vouchers:

  • in addition to your salary, or
  • as part of a salary sacrifice scheme.

The first case is not very common and shouldn’t affect your tax situation as the additional amount (within the limits allowed) is not taxed anyway.

More typical is the salary sacrifice scheme. The voucher amount is taken off your pre-taxed monthly salary which lowers the amount of taxable income. This then reduces the amount of tax and National Insurance that you pay on the remaining salary.

The voucher amount is paid to your company's voucher supplier in your name and you pay your childcare provider direct from them (making up any balance you might need from your normal wages).

How much could you receive?

If you are a basic-rate tax-payer you can swap (or ‘sacrifice’) a maximum of £243 per month from your wages pre-tax and National Insurance in exchange for childcare vouchers.  If you claim the full amount each month this could save you up to £930 per year in tax and National Insurance.

If both parents are basic-rate tax payers they can both claim the full voucher amount from their individual employers. This means the total benefit could amount to £1,860 per year.

 

maximum of £243 per month
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Higher rate tax payers

Unless you registered for Childcare vouchers before 6th April 2011, if you are a higher-rate tax payer (earning £32,001-£150,000 tax year 2016-2017) and just joining a scheme you will only be eligible to claim £124 per month in tax free vouchers.  Higher rate tax payers pay 40% income tax instead of 20% as basic-rate payers do. This means they will still make the same tax savings as a basic-rate tax payer and not double the tax savings as previously.

Additional rate tax payers can only swap £110 per month for vouchers.

Both parents can sacrifice the maximum entitlement for their individual salaries. It's not a combined income threshold.

Childcare vouchers and Tax Credits

If you're claiming Tax Credits be aware that they can be affected by claiming childcare vouchers and you may end up worse off with vouchers.  The tax credits office take into account any income tax savings you make through vouchers and your calculation for the childcare element of tax credits will be revised downwards to account for them.

The calculator on the HMRC website should help you work out what's best for your circumstances.

Who takes vouchers?

Most registered childcare will accept vouchers as payment, such as nurseries, pre-schools, playgroups, child minders, au pairs and nannies.  They must be registered and regulated.

Different bodies regulate Government registered child minders, nurseries and day care facilities in different UK countries. They are:

  • Ofsted in England
  • The Care and Social Services Inspectorate for Wales
  • The Scottish Commission for the Regulation of Care
  • A Health and Social Services Board or Trust in Northern Ireland

A list of registered providers in your area is available from your local Family Information Service. Find your local FIS here».

If your monthly childcare costs fluctuate you can store them up 'on account' and keep them until you need them (they don't expire for up to three years). It's simple to increase or decrease the amount you buy once you’re in the scheme.

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School age children

You can use vouchers for older children too. Lots of schools and after school clubs will take vouchers for out-of-hours care.

Even if you're not paying for childcare during term-time you can still use them for holiday clubs during school holidays. As with younger children you can save them up ‘on account’ until you need them.

Tax-free childcare scheme

From April 28th 2017 a new scheme is being introduced where eligible families will be entitled to have 20% of their annual childcare costs paid for by the Government (up to a maximum £10,000 per child, per year in childcare costs).

There are differences in eligibility including:

  • Only available for children up to 12 years of age
  • Both parents must be working and each earn just over an average £115 a week
  • Not earn more than £100,000 per year – if one partner earns over this amount neither of you are eligible
  • Eligible self-employed parents can claim
  • Don’t need to rely on an employer being registered with a scheme
  • Employer-Supported childcare will continue if you've already registered by early 2017

 

Depending on your circumstances either scheme could be better you’ll have to take time and work it out. If you decide that Childcare vouchers are better you need to make sure that you sign up before the new scheme starts in early 2017.

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Note: Whilst we take care to ensure Hub content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions.

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