Tax-Free Childcare Vouchers

The UK's working parents now receive more help towards childcare costs, which often account for a large slice of their take-home pay.

According to Daycare Trust, the UK has the highest childcare costs in Europe, and they are rising at well above the rate of inflation. On average, working parents should expect to pay £140 a week for a private day nursery, which comes to around £7,000 a year. Childminders are about a tenth cheaper, but nannies are far more expensive: expect to pay £1,000 to £1,700 a month, plus tax and National Insurance Contributions on top.

Many working parents claim the Child Tax Credit and Working Tax Credit, which provide help towards the cost of raising children. However, these benefits are means tested, and you won't be entitled to anything if your household annual income exceeds £58,000 (£66,000 if you have a child under one).

Nevertheless, many working families can now benefit from an improvement to the taxation of childcare vouchers, which around one in five firms (20%) currently offer to their staff. At the moment, you do not have to pay 11% NICs on childcare vouchers, so £89 of take-home pay can be turned into vouchers worth £100.

The government also gives income tax relief on the first £50 of vouchers bought each week. For basic-rate taxpayers, this relief is worth an extra £11 a week, or £572 a year. Higher-rate taxpayers (about a tenth of the workforce) stand to gain an extra £20 a week, or £1,040 a year. What's more, your employer doesn't have to pay National Insurance on this sum too, which helps to support its admin costs.

However, please note that a formal salary sacrifice agreed with your employer may affect your entitlement to the Working Tax Credit (because the childcare element of the WTC doesn't cover voucher spending), so check with HM Revenue & Customs & to see how your entitlement would be affected.

The Daycare Trust has produced a more detailed explanation of how childcare vouchers work (see this Word document). Accor Services, the UK's biggest voucher provider, also provides a lot of useful information on its website.