Working parents spend an average £4,500 a year on childcare according to the Daycare Trust; that's a huge chunk of your hard earned cash.
But while childcare doesn't come cheap, there's an easy way to save over £1,000 a year simply by asking the taxman to stump up too! Paying with 'childcare vouchers' can be the answer for many families; the childcare voucher scheme is a Government backed incentive with companies, both big and small taking part.
How does it work?
You agree with your employer to 'swap' a slice of your salary for the equivalent in childcare vouchers. On paper this looks like you're taking a pay cut, but what you lose from your salary comes straight back as childcare vouchers.
So if you're doing a straight swap then what's the point?
Well let's say you give up say £1,000 of your salary for £1,000 of childcare vouchers, that £1,000 comes from your 'pre-tax' income, in other words your gross salary, (before it gets eaten into with tax and national insurance contributions), so you're effectively gaining some extra cash from the tax man.
If you hung on to that £1,000 as salary; by the time the money hits your bank account it's only worth around £700 if you're a basic rate taxpayer.
Schemes like this tend to be known as 'salary sacrifice' schemes; simply because you're 'sacrificing' part of your salary in exchange for other benefits.
How much can I get?
You can get up to £243 of vouchers per parent, per month; (or £55 a week), under this tax break, regardless of the number of children you've got. And if you and your partner are both employed by companies offering this scheme you can double your savings if you both apply.
If your childcare costs change at any time, you can adjust the amount you swap for childcare vouchers; most employers will usually just need a month's notice to do this.
How can I get the vouchers?
Speak to your employer. Lots of companies offer the scheme and some even hand out vouchers as part of your employment package; although for most people it's the 'salary sacrifice' option as outlined above.
Companies can run the scheme themselves or may get an external company specialising in workplace benefits like Vebnet to organise the admin side for them. In most cases childcare vouchers are credited electronically; and just like online banking, you can check on payments and make them direct to your childcare provider.
The downside is if you're self employed as you won't be eligible unless you've formed your own company. If this is the case, it's worth having a chat with your accountant who can explain your options for getting the vouchers.
Where can I use them?
You can only use vouchers to pay for registered childcare like nurseries, childminders, after school clubs, holiday schemes and nannies. And the great thing is you don't have to use the vouchers for full time regular childcare; you can just use them for school holiday periods to cover the cost of holiday clubs. Check the registered childcare available in your area by calling the Families Information Service on 0800 234 6346.
Will childcare vouchers affect my tax credits?
Swapping part of your salary for childcare vouchers can affect the amount of tax credits you get. Because of the complexity of the tax system it's worth doing a few sums first to see what's best for you based on your household income and family circumstances.
To work out if you're better off with the childcare vouchers or sticking with any existing tax credits get the sums done for you here.
And finally if you're a higher rate tax payer and contemplating joining a childcare voucher scheme; sign up before next April when rules for claimants who are higher rate taxpayers change. Basically after this time the tax breaks won't be as great, as the Government is trying to level out the tax benefits to everyone regardless of income. For anyone already signed up before April the rules won't change.
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