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Childcare vouchers are a great way for parents to save money on the cost of nurseries, childminders or nannies- to the tune of up to £933 per year. Childcare costs are continuing to rise every year so it’s important to save as much money as possible. Read on to find out everything you need to know and what to watch out for.
Childcare vouchers are part of a government-backed scheme that offers working parents childcare vouchers that they can redeem for certain types of care for their children. They’re exempt from tax and national insurance contributions, but parents who use them have to accept a reduction in salary.
Tax breaks were to be withdrawn from employer-sponsored childcare vouchers by April 2015. Happily, this was scrapped and now the only change will be that new entrants to the scheme from April 2011 will only get tax relief at the basic rate of 20%. So higher-rate tax payers will receive less vouchers than previously, while basic rate tax payers’ entitlement will be unaffected.
Yet it’s still the case that many parents are not taking up the chance to use the vouchers – but this is often because they don’t understand how the scheme works, or they’re simply unaware that the scheme exists.
Make sure you’re not one of them. Find out here what they are and how to get them.
The company you work for has to be signed up to the scheme for you to get the vouchers. There are tax benefits for companies if they sign up. For example, they don’t have to pay national insurance contributions on your salary sacrifice, so there’s every chance you can persuade them to join.
Your employer will take part of your salary in exchange for vouchers that can then be used to pay for childcare.
Employers can either run the scheme themselves, or use a voucher company which will organise the scheme for them. Many prefer using a company to avoid administrative hassle.
Once you have your vouchers you can redeem them for various types of childcare including nurseries, childminders and nannies. Those childcare providers will in turn redeem the vouchers through either the employer, or the voucher company.
Most employers will require ‘salary sacrifice,’ whereby you agreed to forfeit a portion of your earnings in return for the vouchers.
The number of children, jobs, or employers you have won’t affect your taxes. You can get up to £55 a week, or £243 a month free of tax and National Insurance Contributions (NICs).
However, since 6 April 2011 the rules have changed. If your earnings are more than the higher or additional rate thresholds then the amount you can get free of tax and NICs is reduced – up to £28 per week, £124 a month for higher rate earners and £22 per week, £97 a month for additional rate taxpayers. This only applies if you join your employer’s scheme after 6 April 2011.
N.B. The vouchers also have a long or no expiry date – so you can always take the maximum amount and use it at a later date. This may be useful for parents who need extra childcare during the long summer holidays, for example.
If you were to take the full £243 per month, you would save £933 per year as a basic-rate tax payer.
The good thing about childcare vouchers is it’s not really a reduction in salary. The money you get in vouchers includes the money you would have paid in tax. So, in effect, you make some extra cash as you get some of your tax back.
N.B. If your partner is eligible too you can double your allowance and save twice as much money.
Do be aware, though, even if you agree to a formal salary reduction agreed with your employer your entitlement to Working Tax Credit will still be affected.
These vouchers aren’t for everybody. It is possible that some parents will actually lose money with the vouchers.
If you’re claiming the childcare element of Working Tax Credit (which can cover up to 70% of the costs) then Revenue and Customs will only help with costs that you meet yourself, not those you pay with the vouchers. If you’re using the vouchers, the payment of the childcare is actually considered to be paid by the employer, not you. This means that even though you’ve paid for them through the ‘salary sacrifice’ the amount of tax credits you receive could fall.
Other contributions-based or income related benefits may be affected too. So it’s really important to check the HM Revenue & Customs’ calculator here to double check that you would be better off with the vouchers.
There is a list of different types of childcare (and childcare qualifications) that are allowed so check you are happy with the choice of childcare available. According to the HMRC, the following childcare qualifies for tax-exempt childcare vouchers:
• A childcare provider approved under the Ministry of Defence accreditation scheme abroad.
In England only
> A person registered under Part 3 of the Childcare Act 2006. This will include persons on the following registers operated by Ofsted:
• The Early Years Register
• The general Childcare Register – compulsory part
• The general Childcare Register – voluntary part.
> Schools – care provided by the governing body of a school is approved if it takes place:
• outside normal school hours (this means the normal hours of compulsory education adopted by the school as appropriate for the age of the child)
• on school premises, or
• on premises that are covered by the inspection of the whole school activity by Ofsted or the equivalent inspection body for certain independent schools.
> Other care providers
• a domiciliary worker or nurse from an agency registered under the Domiciliary Care Agencies Regulations 2002 providing childcare in the child’s home.
In Wales only
• A childcare provider registered in accordance with Part 2 of the Children and Families (Wales) Measure 2010.
• Out-of-school-hours childcare, provided by a school on the school premises, or by a local authority.
• A person approved under the Approval of Child Care Providers (Wales) Scheme 2007 providing childcare in the child’s home or if several children are being looked after, in the home of one of the children.
• A domiciliary worker or nurse from an agency registered under the Domiciliary Care Agencies (Wales) Regulations 2004 providing childcare in the child’s home.
• A foster parent in relation to a child other than one whom the foster parent is fostering only in those cases where due to the age of the child the care provided does not fall within the first and third bullet points in this section.
In Scotland only
• A childcare provider registered by the Scottish Commission for the Regulation of Care.
• Out-of-school-hours childcare clubs registered by the Scottish Commission for the Regulation of Care.
• Childcare provided in the child’s home by, or introduced through, childcare agencies, sitter services and nanny agencies which are required to be registered.
In Northern Ireland only
• Child minding or day care in accordance with Part XI of the Children (Northern Ireland) Order 1995.
• Out-of-school-hours childcare, provided by a school on the school premises, or by an Education and Library Board.
• A person approved under the Tax Credits (Approval of Home Child Care Providers) Scheme (Northern Ireland) 2006 providing childcare in the child’s home.
• A foster parent in relation to a child other than one whom the foster parent is fostering but only in those cases where due to the age of the child the care provided does not fall within the first and third bullet points in this section.
Don’t delay- find out if you can join your employer’s scheme today. Childcare vouchers are a fantastic way to save money on often crippling childcare costs. For more information visit HM Revenue and Customs’ website and also the Daycare Trust. As usual, Direct.gov.uk also has some useful information.
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