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Back to school – childcare vouchers versus tax-free childcare account

There continues to be poor take-up of the Government’s Tax-Free Childcare Accounts which provide a 25% subsidy towards the cost of childcare.

The system operates by topping up savings of up to £8,000 per child by 25%, potentially an extra £2,000 from the Government to spend on qualifying childcare. The scheme applies to children under 12 and the account can be used to pay nursery fees, breakfast clubs, after school clubs and registered childminders. In contrast childcare vouchers may be used to pay for childcare up to age 16. Despite the PAYE and NIC advantages not all employers provided childcare vouchers.

Tax-free childcare accounts are available to both employees and the self-employed. To be eligible the parent generally needs to be working and earning at least the National Minimum Wage or Living Wage for 16 hours a week on average. For a 3 months period they need to earn at least £1,976 and they are not eligible if their adjusted net income is more than £100,000 a year.

Interaction with childcare voucher schemes

Tax-free childcare accounts will gradually replace childcare voucher schemes as no new schemes could be set up after 4 October 2018. Those within voucher schemes continue to be eligible until their child is aged 16, provided the employer is willing to continue operating the scheme.

Many organisations provided the vouchers by way of salary sacrifice and there were tax and NIC advantages. However, with many employees working from home during the pandemic and the move to hybrid working many families found that they were not using all of their vouchers and chose to leave the scheme.

Note that the two schemes are mutually exclusive, and employers must stop giving their employees childcare vouchers with income tax and NIC relief if the employee informs them that they’ve started using the Tax-Free Childcare scheme.

The employer may need to stop or change the employee’s salary sacrifice arrangement and must also update the employee’s contract and their payroll software.

Rob Case Tax Partner, or a member of his team, will be happy to have a chat if anything needs clarification – please call 01242 776000 or email