Childcare vouchers and tax credits


Childcare voucher schemes – what you can save

Childcare Voucher Schemes and Tax Credits

If as a working parent you are already receiving Working and Child Tax Credits and have the opportunity to make a salary sacrifice to obtain childcare vouchers, then there are certain questions you may need to consider before committing to the scheme.

Choosing to become a member of a childcare voucher scheme may impact your eligibility to receive Child Tax Credits. Before parents can establish whether participation in a childcare voucher scheme is worthwhile, it is important to understand exactly what each of these terms mean.

Childcare Voucher Schemes and Salary Sacrifice Schemes

If your employer offers childcare vouchers, you can choose to pay for them as part of your wages. In other words, you sacrifice part of your wages in return for a similar value in childcare vouchers. The scheme obviously has financial benefits and implications and your contract of employment will include a signed agreement confirming your acceptance of the salary sacrifice. Your employer will then benefit as they will pay no national insurance contributions on the agreed amount, giving them savings of up to £402. As an employee you will pay no tax or national insurance either on the vouchers which could amount to potential savings of around £1.000 per year.

Child Tax Credits and Working Tax Credits

The Working Tax Credit (WTC) and Child Tax Credit (CTC) started in April 2003 under the incumbent Labour government. Although originally intended to be simple, the rules and regulations affecting WTC and CTC have become complicated. In essence, the amount of WTC/CTC awarded depends on a number of factors including the number of hours you work, how many children you may have and whether you are contracted to pay any eligible childcare costs.

The big question is obviously if you will be better off accepting Childcare Vouchers in return for a salary sacrifice, or claiming tax credits to help towards your childcare costs? You will need to speak to an expert to be certain, but here are some guidelines:

  • Families will always benefit from taking a tax and national insurance-free voucher if it is offered to them on top of their salary.
  • Generally families will benefit from taking childcare vouchers if the amount of their qualifying childcare costs is greater than the current childcare limits (£175 a week for one child, £300 for two or more children.)
  • Generally, families who are receiving tax credits at the family element rate or less will gain from claiming the tax and NICs exemption offered by the childcare voucher scheme. This is only applicable when they are claiming for the childcare element in Working Tax Credit (£545 or less)
  • Generally, families who are receiving tax credits at a level greater than the family element rate will not gain from claiming the tax and NICs exemptions unless the person offered the Childcare Vouchers is a higher rate tax payer.
  • It's also important to remember that families who receive childcare vouchers from their employers cannot then claim the childcare element of Working Tax Credit on the same costs.

For further information please speak to Early Years Vouchers - 0800088 7315.

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