Home Advice & informationChildcare What is the difference between Tax-Free Childcare and Childcare Vouchers?

What is the difference between Tax-Free Childcare and Childcare Vouchers?

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. From October 2018, Childcare Vouchers will no longer be available to new applicants, so if you are considering applying it’s important to understand the key differences between Childcare Vouchers and the similar Tax-Free Childcare scheme.

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. From October 2018, Childcare Vouchers will close to new applicants. However, you will continue receiving vouchers after this date as long as you join the scheme and receive your first voucher before October 2018, and:

  • 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

 

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.