Tax-Free Childcare and Childcare vouchers are both schemes designed to help with childcare costs. In most cases they are only useful if your income is too high to benefit from Tax Credits and Universal Credit. Childcare Vouchers are no longer available to new applicants, so this article is only relevant if you already get childcare vouchers and are considering whether to switch to tax-free childcare.
Tax-free Childcare is a government scheme introduced in 2017. Eligible parents can open a childcare account which is topped up by the government to cover 20% of childcare costs. Tax-Free Childcare was introduced as an alternative to Childcare Vouchers where employers offer vouchers to pay for childcare based on a salary sacrifice scheme. Childcare Vouchers allow you to avoid paying national insurance and income tax on the proportion of your income that is spent on childcare. At present you can choose whether to use Tax-Free Childcare or Childcare Vouchers. It is not possible to use both schemes at the same time and if you have a partner, you and your partner must both use the same scheme. If you or your partner already get childcare vouchers, you can continue receiving vouchers as long as:
- you stay with the same employer and they continue to run the scheme
- you don’t take an unpaid career break of longer than a year
- you don’t switch to the childcare voucher scheme.
What are the main differences?
|Childcare Vouchers||Tax-Free Childcare|
|Childcare Vouchers are administered by your employer and not all employers offer the scheme.||Tax-Free Childcare is administered by the government and does not involve your employer.|
|Childcare Vouchers are available to parents with children under 16 (or 17 if disabled).||Tax-Free Childcare is available to parents with children under 12 (or 17 if disabled).|
|Childcare Vouchers allow each parent to not pay income tax and national insurance on a maximum of £55 per week. Income tax saving is capped at 20%.||Tax-Free Childcare offers a flat rate saving of 20% of childcare costs with a maximum government top-up of £2000 per year per child.|
|Childcare Vouchers can be used together with Tax Credits or Universal Credit, but most parents who are eligible for Tax Credits or UC are better off not using the scheme.||Tax-Free Childcare cannot be used if you are receiving Universal Credit or Tax Credits. Applying for Tax-Free childcare will immediately end your Universal Credit or Tax Credit claim.|
|Not available for new applicants after October 2018.||Tax-Free Childcare will continue to be available for the foreseeable future.|
Which Scheme will make me better off?
The government has an online calculator which will work out how much you can save on childcare costs. It compares Childcare Vouchers, Tax-Free Childcare, Tax Credits and Universal Credit. Most parents who are eligible for Tax Credits or Universal Credit are better off not using Childcare Vouchers or Tax-Free Childcare.
Who will lose out from the removal of Childcare Vouchers?
Childcare Vouchers and Tax-Free Childcare are of most benefit if your income is too high for Tax Credits or Universal Credit. When comparing the Voucher and Tax-Free Schemes the following groups are most likely to be better off using vouchers:
- Parents with children over the age of 12
- Parents who have childcare costs which are under £470 a month and both parents are eligible for Childcare Vouchers
- Parents who have childcare costs under £240 a month and one or both parents are eligible for Childcare Vouchers
- Parents who earn more than £100,000 per year
These rules provide general guidelines but will not apply in all cases, so it’s always best to use the online calculator to see which scheme is best in your personal circumstances.
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