All You Need To Know About Saving Money With Childcare Vouchers

When my son was six months old, I went back to work full time in an office. This was only possible because I found excellent childcare. However, I couldn't have afforded this without the use of childcare vouchers.

Childcare vouchers are an 'employer benefit'. That is, you only get them through your employer. So if you're self employed, as I am now, you're out of luck. My husband, however, isn't so we can get them through his workplace.

You can get up to £243 in allowance a month with these vouchers. What this allowance means is that up to £243 a month or £55 a week can be deducted from your salary before tax and NI contributions are calculated. If, as happened to me, this puts you into a lower tax bracket it can make a significant difference.

The most popular way for employers to administer childcare vouchers is through salary sacrifice. You might already be participating in a salary sacrifice scheme for something else, such as charity contributions.

With salary sacrifice, you the employee agrees to a reduction in salary that's to the equivalent value of the childcare vouchers. You save on tax and NI, and your employer also saves on NI contributions through this method.

Ch-ch-ch-changes

Of course the current government has made changes to the childcare voucher system, and these came into effect on the 6th of April of this year. Now, all my information comes from my own research into this for our purposes - extra tuition for my son - and I can't say that I'm an expert. Please take this information as a starting point but also make your own enquiries.

From that date, the  full tax and national insurance (NI) relief on up to £55 a week is applied only to basic rate tax payers. Tax relief is now  restricted to £28 for those on the 40% tax bracket and £22 for 50% taxpayers.

What can I use vouchers for?

You can get the full HMRC definition here. There are some differences between England, Scotland, Wales and Northern Ireland, so it is best to check for your region. The vouchers apply to childcare for children up to the 1st of September after their 15th birthday, or their 16th birthday if disabled.

In England, briefly, you must use a form of 'qualifying childcare'. This is defined as an Ofsted registered childcare provider, a worker or nurse from a registered agency, and depending on the circumstances (such as extended hours care), a school.

For example, we could use this system through my husband's employer to pay for a tuition course with Explore. It could reduce the 'real' cost of an £80 a month course down to £60 a month. This depends on the tax bracket you're in.

How to use the vouchers

If you are both taxpayers through an employer, and you have more than one child or costs are such that you could split them between you, then you can both take advantage of the tax break.

There is the £243 limit, but this is per taxpayer not per child.

Your employer will have to carry out a basic earnings assessment, but should cover all the administration of the scheme for you. The scheme does run per year though. That is, you need to sign up for a tax year. Obviously, this is nullified is you leave your employer (which I did just two months into one tax year, then had to set up again with new employer).

I believe it is possible for you to get your vouchers in paper form, but I don't think many employers or schemes operate that way. Most businesses will use a childcare voucher scheme from a provider, who handles all the work for them. In my experience, payments for my son's nursery went straight from my salary to the provider, who paid the nursery.

This made things a lot simpler and easier for me! Alternatively, the company may pay the vouchers to the childcare provider directly, and you make your payments to the childcare provider.

Any downsides?

It all sounds good so far. You pay less tax and NI, and your employer saves on NI contributions too. Is there anything you need to take into consideration.

Well, if you're doing this via salary sacrifice, then your income on paper will drop. This could affect other income related items, such as pensions contributions. The benefits of vouchers should work out to more than this might cost you, but it is worth keeping in mind.

Now this didn't affect me, but I have heard that it can be an issue so you would need to look into it for yourself. I believe that Childcare Vouchers can have an impact on Tax Credits, if you are entitled to these.

Tax Credits are worked out for childcare based on what you pay for in childcare in cash. So, if you pay your childcare through a salary sacrifice voucher scheme, it won't qualify for tax credits.

This is where it all starts to confuse the living daylights out of me! There is a calculator on the HMRC website, click HERE, that should help you work out whether you are better off with vouchers or tax credits.

This point about tax credits only came to light for me when I was researching this post. It doesn't seem to be particularly well known. Certainly the childcare providers we have talked to all make it sound like there's no downsides to the scheme at all. It is possible that they don't know about this 'technicality'.

I'd love to know what your experience has been of childcare, and whether you've had an issues (good or bad!) with your employer.

Photo credits: The Cooperative, Small Wonders Childcare,