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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 benefits (tax credits or Universal Credit) or through using childcare vouchers from your employer or Tax-Free Childcare from the government.

It’s important to find out whether you qualify for tax credits or Universal Credit before making a decision. If you qualify for tax credits or Universal Credit then in the majority of cases you are likely to be better off claiming help with childcare through benefits and not applying for childcare vouchers or Tax-Free Childcare.

If you apply for and are awarded Tax-Free Childcare your Universal Credit or Tax Credit award will be terminated. This means all of your Universal Credit, including amounts for you, your children and your housing, not just the childcare element. Similarly, if you are claiming tax credits, your Working Tax Credit and Child Tax Credit awards will be terminated not just your childcare element. You will be able to switch back if claiming Tax-Free Childcare was not the right choice for you or your circumstances later change.

Why tax credits or Universal Credit are likely to be a better option

Compared to benefits, almost everybody will be worse off by taking childcare vouchers. 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 benefits.

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.

If you use Tax-Free Childcare, most people save 20p for every £1 of childcare. This is the equivalent of getting back the tax paid at the basic rate of 20%

However, if you qualify for tax credits, for every £1 of childcare you get an extra 70p of tax credits. If you qualify for Universal Credit you can get an extra 85p for every £1 of childcare.

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.

Families getting only a small amount of tax credits or UC might in some cases be better off with Tax-Free Childcare. Compare the amount of tax credits or UC you are likely to get with the 20 per cent of your childcare costs available through Tax-Free Childcare. A claim for Tax-Free Childcare will terminate your full tax credit or Universal Credit award.

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