Childcare vouchers or Tax-free childcare: What’s the difference?

If you’re looking for ways to save on nursery fees, you might have heard about childcare vouchers and Tax-Free Childcare. But what’s the difference? And more importantly, which one is right for your family?

Childcare vouchers were introduced in 1989 but closed to new applicants in 2018. That means unless you’ve been using them continuously through the same employer since then, you won’t be able to join the scheme. However, Tax-Free Childcare is still open to new applications and could help you save on childcare costs.

In this guide, we’ll explain how both schemes work and help you decide what’s best for your family.

How does Tax-free Childcare work?

Tax-Free Childcare is a government scheme designed to help working parents with childcare costs. Here’s how it works:

• You pay into a dedicated childcare account, and for every £8 you deposit, the government tops it up with an extra £2 (This is capped at £500 per term)
• You can receive up to £2,000 per child per year (£4,000 if your child has a disability).
• It’s available for children up to September after they turn 11 (or 16 if they have a disability).
• You can use it to pay for approved childcare, including nurseries, childminders, after-school clubs, and holiday clubs.

Who is eligible for Tax-free Childcare?

• Parents must each earn at least £152 per week (or a total of £2,379 per quarter if self-employed). However, there are exceptions to this if one parent is a full-time carer in receipt of Carer’s Allowance, or is in receipt of Employment and Support Allowance (ESA).
• If you or your partner earn over £100,000 per year, you won’t be eligible.
• You can’t receive Tax-Free Childcare if you’re already claiming the Childcare Element of Universal Credit or Working Tax Credit.
• If a new partner (who is not the other parent) moves in with a lone parent and doesn’t meet the eligibility criteria for Tax-free Childcare, the household will no longer be able to claim it.

Find out more about Tax-free Childcare.

How do childcare vouchers work?

Childcare vouchers were a salary sacrifice scheme offered by employers, allowing parents to pay for childcare tax-free. However, new applications closed in 2018.

If you were already using the scheme at that time and have remained with the same employer, you can continue receiving childcare vouchers until your child turns 15 (or 16 if they have a disability).

• If you’re still on the scheme, you can use your vouchers for registered childcare providers, including nurseries, childminders, and after-school clubs.
• You can also add younger siblings to your existing childcare voucher scheme if your employer still offers it.
• If you leave your employer or switch to Tax-Free Childcare, you can’t rejoin the childcare voucher scheme.

Childcare Vouchers vs Tax-free Childcare

If you have a choice, deciding between childcare vouchers and Tax-Free Childcare depends on your family’s situation, so it’s important to do your own research. However, here is a quick overview of each scheme: 

Childcare vouchers may be better if:

• You have lower childcare costs (£4,650 per year or less for single parents, £9,300 or less for couples on basic-rate tax).
• One parent doesn’t work.
• One parent earns over £100,000 per year.
• You have children aged 11-15 who still need childcare support.

Tax-Free Childcare may be better if:

• You have higher childcare costs (£4,650+ per year for single parents, £9,300+ for couples).
• You have more than one child in childcare.
• You’re self-employed.

Important: If you receive the Childcare Element of Universal Credit or Working Tax Credit, you could get up to 85% of childcare costs covered – which is usually more beneficial than either scheme.

Check what works best for you with the government’s childcare costs calculator.

What to do if you want to start using Tax-free Childcare?

If you currently use childcare vouchers and want to move to the Tax-free Childcare scheme, or want to start using it, you just need to apply on the government website.

Once your application has been successful, you will need to give your employer written notice that you want to withdraw from the childcare voucher scheme (within three months). You can also call your voucher provider directly to ask them to stop your membership. 

Any childcare vouchers that you have left can still be used alongside Tax-free Childcare to pay towards childcare costs while the vouchers are still valid. It’s important to check expiry dates to make sure that you don’t miss out on using them in time. 

Using childcare vouchers or Tax-free Childcare with Kids Planet Nurseries

At Kids Planet, we know that managing childcare costs can feel overwhelming. That’s why we accept both childcare vouchers and Tax-Free Childcare at all of our nurseries! Plus, you can combine these schemes with your funded childcare hours to make the most of your savings.

If you have any questions about using government schemes for nursery costs, you can contact us here or get in touch with your nearest Kids Planet nursery.

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