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Childcare Voucher Scheme and Tax Credits

Childcare Voucher Scheme

OVERVIEW

The Government introduced the Childcare Voucher Scheme in 1989, though it has since seen some changes. The initiative is designed to save parents (or those who have parental responsibility such as a guardian) money on childcare, as no tax or National Insurance Contributions (NICs) are paid for the cost of childcare. Employers that provide this scheme also benefit from not having to pay NIC's on this money. The vouchers do not have an expiry date, so can be saved to use when they are needed. The vouchers can only be used to pay for registered childcare providers. Please note that the scheme is due to change in August 2015.

HOW does it work?

An employer may offer childcare vouchers as part of your pay, known as 'Salary Sacrifice'. The cost of the vouchers is deducted from your overall pay (Gross pay) before Tax and NIC's are deducted, effectively putting money back into your take home pay (net pay). The Salary Sacrifice is not permitted if it reduces your salary to below the National Minimum Wage.

Process:

  1. Identify a registered childcare provider and confirm that your employer runs the scheme. You will need to provide your employer with the details of the provider and proof that they are approved by OFSTED. (OFSTED is the government official approval body for childcare).
  2. Nominate the amount you want to sacrifice to childcare vouchers. There are restrictions on this, as it is dependent on your gross pay and tax bracket. Please note that it may be difficult to reduce the amount you opt to sacrifice once agreed, so try to calculate exactly what you would spend. If each month is different, it may be worth estimating the full year and then divide by 12.
  3. You sign a contract with your employer after agreeing the 'Salary Sacrifice'
  4. An account is set up for you to receive the childcare vouchers, Vouchers are usually paid monthly or on 'pay day'.
  5. Set up a direct debit to pay your childcare provider from this account.
  6. Save receipts from your registered childcare provider, in case HMRC audit your tax and NICs.

WHAT does it cover?

If you have a child up to the age of 15, or 16 if registered disabled, you can use the vouchers to pay for: nanny, independent and state run nursery, child-minder, before and after school clubs, holiday clubs, activity clubs and the 'boarding' cost of a boarding school.

Leaving the scheme: You can leave the scheme if you have a legitimate reason for doing so. This may include: leaving your current employment, divorce of partner, death of partner, redundancy of partner, maternity leave, your child leaving school. Your employer may require a months notice if you wish to leave the scheme.

WHO can apply?

Anybody with parental responsibility can apply, provided that they are employed. If both parents are working, both can apply and receive vouchers, increasing the household budget. The scheme is available to use for children from birth to 15, or 16 if disabled. The amount of children you have does not alter the amount of vouchers you may be able to claim, as the maximum is based on your gross pay and tax bracket. However, your vouchers can be used for all of your children aged under 15, or 16 if registered disabled.

Child Tax Credit

OVERVIEW

Child Tax Credits allow tax relief on childcare costs and are available to use for children that are aged under 16 and also for those under 20 that are in approved education or training. They are not automatic, you must apply for them and only one person per household can receive Child Tax Credits. They do not affect Child Benefit and you don't need to be working to claim them. However, if you receive childcare vouchers, you may see a reduced amount of child tax credits, or could actually end up worse off by electing to take them.

HOW does it work?

You must apply to receive Child Tax credits via the Tax Credit Helpline, who will send you a form. New claims can take up to 5 weeks to process and you must renew your claim annually. You should keep records of expenditure and income such as salary, household bills, benefits and childcare costs. You should keep the records for at least 3 years. The amount awarded is based on your earnings and other circumstances. Any Tax credits you receive will be paid into an account, four weekly, from the date of your claim to the end of the tax year 5 April. If your circumstances change you must advise the Tax Credit Office immediately.

WHO can apply?

Anyone who has responsibility for a child aged under 16 and under 20 if they're in approved education or training can apply for Child Tax Credits. If claiming for under 16, the claim will cease on 31st August after their 16th birthday. If shared responsibility, only one application will be allowed. You may also be able to claim for a child that you foster or adopt, providing you are not in receipt of payment from your local authority.

HOW much will I receive?

Each application is treated separately and the amount you receive will depend on your income and circumstances, such as how many children you have or if you have a child registered as disabled. However, the basic amount if eligible is a maximum of £545 a year. In addition there are 'elements' which add to the basic maximum amount you could receive. For each child, you could receive up to another £2,750, for a disabled child this increases to a maximum of £3,100 and for a severely disabled person could receive a maximum of £4,355, plus the £545.

You can visit www.gov.uk/child-tax-credit/overview to find out if you would benefit from the Childcare Voucher Scheme or apply for Child Tax Credits.