How childcare vouchers work

Childcare vouchers can save many parents with children aged up to 15 over £1,000 a year on childcare. Frustratingly it is only available via employers, but many large and small companies take part.

The key is they enable you to pay for childcare out of your PRE-TAX and National Insurance income. While this doesn’t sound much, the benefit is huge.

It works by ‘salary sacrifice’

A few very generous employers will simply give you the vouchers on top of your normal salary, but most will ask you to do what’s called a ‘salary sacrifice’, which works something like this (basic rate tax example)…

You give up £1,000 of salary but after tax & NI that’s only worth £700ish in your pocket.

In return you get £1,000 of vouchers so you’re £300 per thousand better off.

For an accurate figure of savings look at calculators on Accor Services or Computershare Voucher Services. Yet always check first if you’re eligible for tax credits – see the tax credit warning for more info.

Of course, once you no longer need to pay for childcare, you should ensure you get your full salary back (we’ve never heard of this being a problem, but it’s worth checking).

How many vouchers can you buy?

You can pay for up to £243 of childcare with it each month (£55/week). This is PER PARENT so two working parents could get £486 a month of vouchers. The number of children you have doesn’t impact this; the limits are the same whether you’ve one child or a football team!

Vouchers aren’t specific to each child and have a long expiry date, so if you know you’re going to have higher childcare costs in the near future get the maximum allowance now.

Also many providers will let you backdate vouchers up to six months, although your child must be born for you to be able to sign up. Check your individual provider’s procedures first.

Urgent! Higher rate taxpayers join now!
Before childcare voucher changes due 6 April 2011

In 2009 there was much to-ing and fro-ing over the future of childcare vouchers, with talk of abolishing them – yet that is NOT happening.

However the June 2010 emergency budget announced major changes in the amount of vouchers allowed for higher 40% and top rate 50% tax payers. Here’s a rough synopsis…

Current situation (per parent):

Basic (20%) Taxpayer. Allowed £55/week vouchers, max. annual gain £890.
Higher (40%) Taxpayer. Allowed £55/week voucher, max annual gain £1,170.
Top (50%) Taxpayer. Allowed £55/week voucher, max annual gain £1,460.

New joiners after 6 April 2011 (per parent):

Basic (20%) Taxpayer. Allowed £55/week vouchers, max. annual gain £920.
Higher (40%) Taxpayer. Allowed £28/week voucher, max annual gain £610.
Top (50%) Taxpayer. Allowed £22/week voucher, max annual gain £590.

Where previously the scheme benefited higher earners disproportionately, these changes were meant to give roughly the same maximum tax gain for all taxpayers, yet when you factor in next year’s changes to national insurance, basic rate taxpayers do much better.

Yet the most important point is…

If you are already in the scheme by 6 April 2011, then you can continue to get the current amount of vouchers.

Therefore if you’re planning to join, doing it on or before 5 April 2011 is highly worthwhile for higher taxpayers. Remember, most vouchers have a long date on them (e.g. three years) so even if you don’t quite need them yet, but definitely will, it’s worth getting into the scheme (even if only buying small amounts as you can increase payments once in the scheme) before the allowances plummet.

What counts as childcare?

The vouchers cover childcare up to 1 September after your child’s 15th birthday (16th if they are disabled).

The provider must be regulated

They’re usable by any nursery, playgroup, nanny, childminder or au pair who is registered and regulated – most are.

The easiest way is to simply ask them, yet the main source of information in England is the local Families Information Services (FIS), which should be able to tell you about the provision available in your area. Its number is 0800 234 6346 or go to the Ofsted website

Alternatively go to Family Information Directory where you can find local registered childcare.

Those whose relatives look after a child in the child’s own home won’t be eligible to receive the vouchers. Yet vouchers can be claimed for carers that are registered childminders looking after a child in their own home.

Further help with childcare costs

There are other schemes in place to help with childcare costs, including tax credits, holiday provision, and, from September 2010, at least 15 hours a week free childcare (to be spread over at least three days) for all three and four year olds for up to two years before they reach school starting age (term time only). Read the Childcare Costs guide for more info.

Where to get vouchers from?

Any parent, or those with parental responsibility for a child living with them, is eligible for the vouchers. Yet sadly, to get them, your employer must run a scheme. Follow these steps:

Ask your employer if it runs a childcare voucher scheme.

Check with your Human Resources / Personnel department to see if yours does. Most big employers, such as Lloyds, Barclays and Sony offer the schemes. Many NHS Trusts and Ministry of Defence departments do too and since 2006 teachers have also been able to use the scheme.

Sadly, if you’re a sole trader you’re not eligible, as you’re not classed as an employer.

What if your employer doesn’t offer a scheme?

Providing childcare vouchers shouldn’t cost your employer any money. In fact, as they don’t pay national insurance on the vouchers, it actually makes them serious profit – £100s per employee! So try and persuade them; perhaps chat to other parents and go as a group to request the facility, even printing out this article to show them.

Firms can offer voucher schemes one of two ways, either by operating the scheme themselves or by using one of the many voucher companies to do all the admin for them. The fee for this should be less than the firm gains in national insurance, so they’ll still profit.

These providers include: Kiddivouchers (which donates at least 5% of all profits to various charities) and Employersforchildcare (a not for profit organisation). See a full list of providers .

Many of these companies will also contact your employer for you upon request.

A major impact on childcare tax credits…

Though the name’s confusing, tax credits are simply a type of benefit you get put into your bank account.

Yet it can be a massive amount of cash, the current average payout for those eligible is £68 a week or £3,500 a year, so this isn’t small potatoes (see Childcare Tax Credits guide for whether you’re eligible).

The problem is for a substantial number of people with children (depending on how many) and family incomes below £42,000 a year, getting childcare vouchers reduces your eligibility for tax credits; overall leaving you out of pocket.

This is because the amount of tax credit you get depends on how much you pay IN CASH (ie not vouchers) for childcare. Here’s a simplified example…

The Jones are entitled to 80% of their childcare costs in tax credits.

Pay £100 in cash a week – they get £80 of tax credits.

Pay £50 in cash and £50 in vouchers (which they had to buy) and they’re only entitled to 80% of £50 paid in cash, which is £40 of tax credits.

The upshot of all this is is massive hit to the tax credits by using childcare vouchers, which means some people are better off not getting vouchers at all. Sadly this is rarely communicated.

Should you go for childcare vouchers or not?

Q1. Are you eligible for tax credits for childcare?
(see childcare tax credit guide if you’re not sure)

If yes – go to question 2.

If no – then you will ALWAYS be better off using vouchers to pay for childcare, as you have no tax credits to be affected.

Q2. Is your family income over £42,000?

Note: From April tax credit payouts drop from a max 80% of childcare costs to 70%, so some at the income borders below may now start to save using vouchers. Ask if your employer’s childcare voucher provider is able to do the sums now but be prepared to check this fully in April; we’ll give you more info at the time.

If yes – in most circumstances you will gain from using childcare vouchers, though those with disabled children should read on…

If no – read on…

For those with family income under £42,000, then as a rough rule of thumb, if you’ve:

One child and a family income under £24,000
Two children and a family income under £30,000
Three children and a family income under £36,000
Four (or more) children and a family income under £42,000

you’re likely to be better off sticking with ONLY tax credits and not getting vouchers. Everyone else should consider getting vouchers, but better still…

Use the special calculator. There’s a useful calculator on the HM Revenue & Customs which will calculate if you’re better or worse off taking the vouchers in the financial year 2010/11.

We think Childcare Vouchers are a good idea for the majority of families & of course reduces your overall childcare costs.