Childcare Vouchers and Tax-Free Childcare – Frequently Asked Questions

The Government is bringing in a new scheme to support working families’ childcare costs: Tax-Free Childcare (TFC). TFC will eventually replace the childcare vouchers and directly contracted childcare provided by employers under the Employer Supported Childcare (ESC) scheme. Both childcare schemes are UK-wide.

Childcare Vouchers

Through ESC, the Government provides support to working parents via an income tax exemption and National Insurance Contributions disregard. There are three forms of ESC: childcare vouchers, directly contracted childcare and workplace nurseries.

Some employers give their employees childcare vouchers which can be used to purchase childcare from a registered childcare provider. Most employers who provide childcare vouchers do so through a salary sacrifice scheme. Recipients do not have to pay income tax and National Insurance on childcare vouchers up to a maximum value of £55 per week. The weekly value allowable depends on how much the recipient earns and when they joined the scheme.

According to the Government, over 50,000 employers offer childcare voucher schemes and it estimates that there are currently 600,000 families using childcare vouchers. The Childcare Voucher Providers Association states that 780,000 parents currently use childcare vouchers.

Tax-Free Childcare

The TFC scheme was introduced in April 2017 and, following a phased roll-out, was fully opened to all eligible parents on 14 February 2018. For eligible working families, TFC offers to cover 20% of childcare costs, up to a maximum value of £2,000 per child per year, for children under the age of 12 (or up to £4,000 per year for children with disabilities under the age of 17). The scheme operates through online childcare accounts. The Government’s 10 point guide for parents provides an overview of the scheme.

TFC will help more working parents to access support with childcare costs, particularly those who: are self-employed; or are not covered by an ESC scheme; or earn on or near the National Minimum Wage. The Government estimates that 1.5 million families will be eligible for TFC and have qualifying childcare costs. The Government contends that TFC is fairer and better targeted than childcare vouchers, in particular because support is paid per child rather than per parent, and there is a maximum income limit for parents of £100,000 per annum.

To date applications for TFC accounts have been significantly lower than expected. As at 29 March 2018 over 210,000 parents had a TFC account. The House of Commons Treasury Select Committee has said that the scheme is “under-performing” and called on the Government to improve awareness of the scheme.

Campaign to Retain Childcare Vouchers

Parents will not be able to simultaneously receive support from both ESC and TFC. Parents who wish to remain in ESC will be able to, while their current employer continues to offer it. There is no obligation to switch to TFC. Existing schemes were initially expected to be closed to new applicants from April 2018. However, following representations, the Government has agreed to keep childcare vouchers and directly contracted childcare open to new entrants for a further six months, until 4 October 2018.

During its inquiry into Childcare the House of Commons Treasury Select Committee expressed concern that the Secretary to the Treasury was unable to provide an economic analysis of who will gain and who will lose out from the transition from childcare vouchers to TFC. The Committee’s inquiry report recommended that the Government evaluates the impact of TFC before closing ESC to new applicants.

A number of organisations, including the charity Working Families and the Childcare Voucher Providers Association, have called on the Government to keep childcare vouchers open to parents alongside the TFC scheme on the grounds that:

• Childcare vouchers are widely-used and popular with parents and employers.
• Some families will lose out under Tax-Free Childcare, compared to childcare vouchers.
• Vouchers provide a way for employers to demonstrate their commitment to supporting family-friendly working practices.

An e-petition calling for childcare vouchers to be retained reached 119,588 signatures. The topic was debated in the House of Commons on 15 January 2018.

Which Scheme Provides More Support?

The Government has estimated that around 1.2 million families will be better off under the new TFC scheme. Furthermore, as ESC will remain open for those already in the scheme, the Government asserts that “there will be no direct losers”.

However, whether ESC or TFC is better for an individual family will depend on their specific circumstances. This might depend on factors such as:

• Whether one or both parents is in an ESC scheme
• The rate of tax paid
• How many children and of which age are receiving childcare
• Childcare costs

In general, families on low incomes are likely to receive more generous support through Tax Credits or Universal Credit than through childcare vouchers or TFC. However, the interactions between the schemes are complex and in certain cases families may be better off applying for childcare vouchers or TFC than claiming benefits.

It is important that individuals seek advice on their own specific circumstances. The Government provides an online childcare calculator to help parents check what help they could get with childcare costs.

The Treasury Select Committee has called on the Government to provide more guidance and advice to help parents understand how the schemes interact and which scheme will be most financially beneficial.

The Government’s Childcare Choices website provides further information on other sources of assistance for childcare costs.