Getting the most help with childcare

Childcare Vouchers or Help with Childcare through Tax Credits?

You may have a choice between getting help with childcare through tax credits or through using childcare vouchers from your employer. It’s important to find out whether you qualify for tax credits before making a decision.

New rules from April 2012, mean that if you qualify for tax credits then you are likely to be better off claiming help with childcare through tax credits and not taking childcare vouchers.

What are childcare vouchers?

If you are working, and you have children, your employer may offer help in the form of childcare vouchers. They do not have to offer this support.

Your employer can:.

  • pay directly towards a childcare service, such as a workplace nursery
  • pay a subsidy to a registered provider outside of the workplace
  • sell you a childcare voucher, usually via a childcare voucher company who they pay to administer the scheme.

Your employer then deducts the amount paid out in vouchers from your gross salary. As the amount is taken from your salary before tax, you have tax advantages if you get vouchers instead of pay.

You cannot claim for childcare costs through tax credits if you pay for childcare with childcare vouchers.

There is no limit to the value of childcare vouchers an employer can supply. However, you will only get the tax advantages up to a maximum of £55 a week. The exact value of vouchers that you can get without having to pay tax or national insurance depends on what rate of tax you pay. The limit for higher rate tax payers is £28 per week (though if you joined the scheme before 6 April 2011, the weekly limit remains at £55 whichever rate of tax you pay).

Why tax credits are likely to be a better option

Almost everybody will be worse off by taking vouchers from April 2012. This is because the reduction you get in tax and national insurance by having the vouchers taken out of your salary before you are taxed is less than the advantages you get through claiming tax credits.

If you use vouchers, most people save 20p of Income Tax and 12p of national insurance contributions for every £1 of childcare – a total of 32p – for every £1 of childcare.

However, if you qualify for tax credits,for every £1 of childcare you get an extra 70p of tax credits.

Before April 2012 there were more instances where some people were slightly better off with vouchers (by 3p for every £1 of childcare). However, changes to tax credits in April 2012 now mean that most people will be better off if they claim help with childcare through tax credits if they are entitled to them.

There are two exceptions to this rule when childcare vouchers may be the better option. For more information see exceptional circumstances when you would be better off with childcare vouchers .

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