Childcare Vouchers vs Tax Free Childcare


Chris Campbell

Chris Campbell

Tax Senior Manager


What’s changing?

Since April 2017, the Government has phased in the introduction of a Tax Free Childcare scheme, which is intended to replace the existing tax relief provided under the Childcare Voucher Schemes offered by many employers.

Childcare Voucher Schemes

From October 2018, new entrants will be not eligible to join an employer’s Childcare Voucher Scheme.  Any employees wishing to join their employer’s Childcare Voucher Scheme must do so before October 2018 and we understand that the employer must have also made a contribution before October 2018 to qualify.  Existing members of a Childcare Voucher Scheme should be able to continue to receive vouchers as long as their employer continues to offer the scheme, they remain employed on the same PAYE reference and do not take an unpaid career break lasting more than 12 months.

Under the Childcare Voucher Scheme, the vouchers are normally under a salary sacrifice arrangement, where the value of the vouchers is deducted from an employee’s gross salary in exchange for a Childcare Voucher which can be used as payment for childcare costs with an approved childcare provider.  This gives a PAYE and Class 1 Employee’s National Insurance saving to the employee.  Employers also receive a saving in Class 1 Employer’s National Insurance, which can help offset the administrative costs of setting up a Childcare Voucher Scheme.

Employees who enrolled in a Childcare Voucher Scheme on or after 6 April 2011 are able to receive maximum vouchers of the following:

  • Basic rate taxpayers can take up to £243 per month free of tax and Class 1 National Insurance
  • Higher rate taxpayers can take up to £124 per month free of tax and Class 1 National Insurance
  • Additional rate taxpayers can take up to £110 per month free of tax and Class 1 National Insurance

Employers are required to carry out an earnings assessment at the start of each tax year to determine the maximum level of vouchers that can be paid free of PAYE and Class 1 National Insurance.  In the case of Scottish taxpayers, HM Revenue & Customs has previously confirmed that the relevant thresholds to apply are the UK rather than the Scottish tax thresholds.  As such, the maximum vouchers that can be provided to a Scottish taxpayer should remain unaffected by the changes to the Scottish Income Tax rates from April 2018.  Employees who enrolled in the Childcare Voucher Scheme on or before 5 April 2011 should be able to receive the full £243 per month free of tax and Class 1 National Insurance, regardless of whether they are a basic, higher or additional rate taxpayer.

The above limits are per parent rather than per child, therefore if both parents’ employers offer a Childcare Voucher Scheme they could receive up to £486 in vouchers per month.

Tax Free Childcare

Under the new Tax Free Childcare scheme, the middle man, i.e. the employer, is taken out of the process and parents can apply to register for an online account where eligible families can receive an extra 20% from the Government towards their childcare costs.  This will effectively give families basic rate tax relief on what they spend on childcare costs up to a maximum cost of £10,000 per annum per child (£20,000 per annum per child where the child is disabled).

Parents cannot be in both a Childcare Voucher Scheme and the new Tax Free Childcare scheme so will need to decide on which is better for their circumstances.   If a parent withdraws from a Childcare Voucher Scheme to enrol for the new Tax Free Childcare scheme, they cannot normally re-register for the Childcare Voucher Scheme after October 2018.

How do the schemes compare?

To decide which scheme is best, parents should look at the criteria and savings available under both schemes:

  • Childcare Vouchers can only be taken where the employer offers the scheme in comparison to Tax Free Childcare which is available to all qualifying parents including the self-employed who previously could not take advantage of a Childcare Voucher Scheme.
  • Tax Free Childcare is not available where either parent has taxable income above £100,000.
  • Tax Free Childcare provides tax relief of up to £2,000 per child (£4,000 if the child is disabled).  Childcare Voucher Schemes provide PAYE and National Insurance relief on up to £243 per month per employed parent whose employer offers a scheme.
  • Childcare vouchers are available to parents of children aged up to 15 years old whereas Tax Free Childcare applies to childcare costs up until a child reaches 12 years old.  Where the child is disabled, the age limit is 16 under both schemes.
  • To qualify for Tax Free Childcare, both parents must normally work and earn a minimum of £120 a week.  If you are self-employed, your earnings can vary but they must average at least £120 a week over the last 3 months.  There is no requirement for both parents to work under a Childcare Voucher Scheme.
  • Despite the above, you may still be eligible to receive Tax Free Childcare where one parent works and the other is not able to and the family receives certain benefits including:
  1. Incapacity benefit
  2. Severe disablement allowance
  3. Carer's allowance
  4. Employment and Support Allowance

What steps should I take next?

This will vary between families and will depend on the level of childcare costs provide.  The new Tax Free Childcare Scheme will benefit the self-employed who cannot benefit from a Childcare Voucher Scheme, as well as employees where their employer does not offer a Childcare Voucher Scheme.

It is important to remember Childcare Vouchers are per family rather than per Child and consider any subsidised hours that children may also be eligible for.  Parents with more than one child and high childcare costs may be better with Tax Free Childcare, but it will depend on various factors.

If you have any further queries, please do not hesitate to get in touch with your usual contact at Johnston Carmichael.