How do vouchers interact with other schemes?

Updated on 15 March 2018

Help with childcare costs is a complicated area because the Government offers different schemes. Each scheme has different qualifying rules and often the amount you receive can be different. Sometimes if you claim help from one scheme, that can stop you claiming help from other schemes and so you will need to try and work out which one is better for you based on your circumstances.

This section explains how the childcare vouchers interact with other childcare schemes.

Tax credits and childcare vouchers

Childcare vouchers are part of Employer Supported Childcare (ESC). Your employer may offer you childcare vouchers in addition to your salary or in exchange for you giving up part of your salary (called a salary sacrifice). By taking childcare vouchers you will save on some tax and National Insurance.

There is nothing to stop you receiving tax credits and childcare vouchers at the same time. However, you can only claim help through tax credits for costs you actually incur. This means you must deduct the value of any vouchers from your average weekly childcare costs for tax credit purposes.

For example, if your childcare costs are £150 a week for one child and you get vouchers of £55 a week from your employer, you can only claim £95 a week as your costs for the childcare element of tax credits.

In some cases the amount of tax and National Insurance you save from taking the vouchers may not make up for the amount of tax credits you lose.

Most people who qualify for tax credits are likely to be better off claiming help through the childcare element of tax credits and not taking childcare vouchers offered through a salary sacrifice. This is because initially you will lose significantly more tax credits than you will gain in tax and National Insurance savings from taking the vouchers and over the longer term you will gain only a small amount from the vouchers. This PDF icon example shows how the interaction between the two schemes works.

However there are some exceptions to this rule. For example, if your childcare costs are a lot higher than £175 a week for one child or £300 a week for two or more children then you can claim vouchers as well as the maximum amounts of tax credits. Similarly, if your employer offers you vouchers in addition to your salary (rather than as a salary sacrifice) you will be better off taking them.

This means it is important that you check your own position carefully and work out which is better. HMRC provide a childcare indicator that can help you decide if you are better off taking childcare vouchers or not. If you use the calculator, you should print a copy of the results and ensure the information you enter is as accurate as possible.

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Universal credit and childcare vouchers

Childcare vouchers are part of Employer Supported Childcare (ESC). Your employer may offer you childcare vouchers in addition to your salary or in exchange for you giving up part of your salary (called a salary sacrifice). By taking childcare vouchers you will save on some tax and National Insurance.

There is nothing to stop you receiving universal credit and childcare vouchers at the same time. However, you can only claim help through universal credit for costs you actually incur. This means you must deduct the value of any vouchers from the childcare costs that you report to DWP for your universal credit claim. 

For example, if your childcare costs are £500 a month for one child and you get vouchers of £238 a month from your employer, you can only claim £262 a month as your costs for the childcare element of universal credit.

In some cases the amount of tax and National Insurance you save from taking the vouchers may not make up for the amount of universal credit that you will lose.

Most people who qualify for universal credit are likely to be better off claiming help through the childcare element of universal credit and not taking childcare vouchers offered through a salary sacrifice. This is because initially you will lose significantly more universal credit than you will gain in tax and National Insurance savings from taking the vouchers.

However there are some exceptions to this rule. For example, if your childcare costs are a lot higher than the monthly maximums for universal credit then you can claim vouchers as well as the maximum amounts of universal credit.

This means it is important that you check your own position carefully and work out which is better. You should contact a welfare rights adviser at a local advice agency for further support. 

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Tax-free childcare and childcare vouchers

TFC is the new childcare scheme that is designed to replace childcare vouchers and directly contracted childcare support from employers. It started to roll-out to certain groups of people from 21 April 2017 and was fully rolled-out by 14 February 2018.

Originally it was announced that the tax and NI relief associated with Directly contracted childcare and childcare vouchers would not be available to any new applicants after 5 April 2018. The Government has now confirmed that this will be extended by 6 months.

Anyone who was claiming childcare vouchers/directly-contracted childcare and gave their employer a childcare account notice (explaining their intention to claim TFC instead and leave the voucher scheme) can no longer claim the tax and NI relief associated with childcare vouchers and directly-contracted childcare even if they leave the TFC scheme and try to do so before October 2018.

Some people will be better off claiming childcare vouchers than tax-free childcare and some will be better off claiming tax-free childcare and leaving their childcare voucher scheme. In addition, people are currently missing out on childcare vouchers may need to claim before the scheme closes down.

See our TFC section for more information.

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Where can I find more information?

You can contact your local Family Information Service for more information about childcare in your area.

Childcare Choices

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