Make the most of childcare vouchers while you can

16 August 2018
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Time is running out for parents to take advantage of the childcare voucher scheme before it closes to new members on 4 October.

While the tax-free childcare (TFC) scheme – which was launched by the government in 2017 – has been designed to replace childcare vouchers, new research suggests that most working families would be better off under the old system, using tax credits or universal credit as well if they are eligible (which cannot be used with TFC).

Under the TFC, parents open an account to pay for childcare. For every £8 paid in, the government tops it up by £2, offering a maximum of £2,000 a year per child.

In comparison, childcare vouchers are offered by employers and allow parents to buy vouchers to pay for childcare before tax and national insurance are deducted. Unlike TFC, both parents can participate – and this can result in savings of up to £933 each per year.

Both schemes reduce the cost of pre-school childcare, as well as holiday play schemes and sports clubs.

Which scheme will save you the most?

A quick glance at the schemes (see table below) suggests that the main beneficiaries of childcare vouchers are parents who earn north of £100,000; if either parent’s earnings exceed this level they will not be eligible for TFC. Families with older children and families where one parent doesn’t work will also be worse off under TFC.

Childcare vouchers and tax free childcare compared

 Childcare vouchersTax free childcare (TFC)
SavingsUp to £933 per annum per parentUp to £2,000 pa per child (£4,000 if disabled)
Can be used with tax credits?YesNo
Earnings limitsNo min or max income appliesEach parent must earn £125+ a week but less than £100k pa
Open to self employed?NoYes
Both parents must work?NoYes
Child eligibilityUnder 16 (17 if disabled)Under 12 (17 if disabled)

Source: childcarechoices.gov.uk

However, analysis from the Childcare Voucher Providers Association (CVPA) shows that many lower and middle-income families could also lose out under TFC, while higher earners stand to benefit. In many cases parents would need to be spending between two and four times the national average on childcare to be better off under the TFC scheme.

The CVPA uses an example of a two-parent family with one child, where both parents have combined earnings of £60,000. If they spent the national average on childcare (£3,780 a year), they would save £1,206 a year with childcare vouchers versus £756 with TFC. Only if this family spent more than double the national average on childcare (£9,331 a year) would TFC offer better value, with savings of £2,000 compared to £1,866 with childcare vouchers.

For a single parent with one child and earnings of £30,000 a year, the average annual childcare spend is £2,362. This family could save £757 with childcare vouchers but only £472 with TFC. If they were to spend double this amount on childcare, they could be provided with better support from tax credits or universal credit alone rather than childcare vouchers or TFC.

Tax credits allow parents to claim 70% of childcare costs up to £122.50 a week for one child or £210 for two or more. Meanwhile, universal credit provides 85% support towards childcare costs up to £646 a month for one child and £1,108 for two or more.

Jacquie Mills, chair of the CVPA, warns: “Closing the childcare voucher scheme to new entrants will not only limit choice, but will hit ordinary working families the hardest.”

Existing members of childcare vouchers will not be affected by the scheme’s closure, but new members must have purchased their first voucher by 4 October.

However, HMRC says the CVPA's figures do not take into account that not all employers offer childcare vouchers, while self-employed workers would not have access to this scheme. Its own data on childcare prices shows the average cost is much higher than the CVPA suggests, particularly for younger children.

In many cases, it says this would mean that the TFC offers better value for money than childcare vouchers. HMRC says the CPVA's figures include informal childcare costs, which neither TFC nor childcare vouchers could be used for anyway. 

A spokesperson for HMRC says: "Tax-free childcare is available to working parents regardless of where they work and includes the self-employed, making it fairer and more accessible than vouchers  – which are only offered by some employers." 

"It will provide support to nearly one million more families compared to the number currently using vouchers. It’s also paid per child rather than per parent, so lone parents can access the same support as couples, and parents get more support as their childcare costs rise," the spokesperson added.

Find out how much help you can get with childcare with the government’s calculator.

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