Should I use Tax-Free Childcare or childcare vouchers?

Full answer

Tax-Free Childcare and employer childcare vouchers were, for a period, two competing ways to get help with childcare costs, but the voucher scheme has been closed to new joiners for some years, meaning most parents today only have Tax-Free Childcare available, with vouchers remaining relevant only to existing scheme members. **How Tax-Free Childcare works** You open a Tax-Free Childcare account and pay money in; the government tops this up at a rate of £2 for every £8 you contribute (equivalent to a 25% top-up), up to a maximum government contribution of £500 per child per three-month period (higher for disabled children) -- the account funds can then be used to pay registered, approved childcare providers directly. **Why childcare vouchers are now closed to new entrants** Employer-provided childcare vouchers, taken via salary sacrifice, are closed to new applicants -- only parents who joined a specific employer's voucher scheme before the scheme's closure date and have remained continuously enrolled since can still use them; if you are not already enrolled, Tax-Free Childcare is your only option regardless of preference. **Comparing value for those still eligible for vouchers** For parents still enrolled in childcare vouchers, the relative value against Tax-Free Childcare depends heavily on income and number of children -- vouchers work via salary sacrifice (saving Income Tax and National Insurance on the sacrificed amount, capped at set weekly limits depending on your tax band and when you joined), while Tax-Free Childcare's 25% top-up is not tied to your tax rate, so the comparison varies by individual circumstances and childcare cost level. **Vouchers and Universal Credit / other means-tested benefits** Childcare vouchers, because they reduce gross salary via sacrifice, can sometimes affect entitlement to other income-related benefits differently than Tax-Free Childcare would, since Tax-Free Childcare does not reduce your reported salary in the same way -- families receiving Universal Credit generally cannot use Tax-Free Childcare at the same time (Universal Credit has its own separate childcare cost support), so checking which support is compatible with your specific benefit situation matters. **Worked example** A parent still enrolled in an employer voucher scheme sacrifices salary to receive vouchers within their scheme limit, saving Income Tax and NI on that sacrificed amount. Comparing this to switching to Tax-Free Childcare (which they could do, though the switch is generally irreversible back to vouchers), they would need to calculate whether the 25% top-up on money paid in would exceed the tax and NI saving from salary sacrifice, factoring in their specific marginal tax rate and total childcare spend. **The switch to Tax-Free Childcare is one-way** If you are currently in a childcare voucher scheme and choose to apply for Tax-Free Childcare instead, you generally cannot go back to childcare vouchers afterwards, even if Tax-Free Childcare turns out to be less valuable for your circumstances -- this makes the comparison worth doing carefully before switching. **Practical tip** If you are still eligible for both, use gov.uk's childcare calculator to compare the actual value of vouchers versus Tax-Free Childcare for your specific salary, tax band, and childcare costs before switching, since the one-way nature of the switch means getting the comparison right matters.

Try the calculator

More answers

• Is a workplace nursery scheme tax-free for childcare?