Childcare Vouchers vs Tax-Free Childcare: Which is Best?

Childcare in the UK isn’t cheap, and many parents find themselves wondering if it’s even worth working once they factor in nursery or childminder bills. To help, the government has introduced a number of schemes, from 15 and 30 hours of free childcare, to financial support with costs.

Two of the most well-known options are childcare vouchers and Tax-Free Childcare.

⚠️ Important note: The childcare voucher scheme closed to new entrants in October 2018. If you weren’t signed up before, you can’t join now. However, if you’re already in the scheme, you can continue to use it for as long as your employer offers it.

That means the main scheme available today for new parents is Tax-Free Childcare. But if you’re already receiving vouchers, you might be wondering whether to stick with them or switch. Let’s break down how both schemes work, and which could save you the most money.

What were childcare vouchers?

Childcare vouchers were a workplace benefit where parents could sacrifice part of their salary in exchange for vouchers to pay for childcare. The advantage? You didn’t pay tax or National Insurance on the portion of salary taken as vouchers.

For example, if you’re a basic-rate taxpayer earning £100 in wages, after tax and NI you’d keep around £70. But if that £100 was taken as childcare vouchers, you could use the whole amount for childcare.

How much could you save?

• Basic-rate taxpayer (20%): up to £55 per week (£933 per year)
• Higher-rate taxpayer (40%): up to £28 per week (£623 per year)
• Additional-rate taxpayer (45%): up to £25 per week (£623 per year)

If both parents qualified, the savings could be doubled for basic-rate taxpayers.

Key facts about childcare vouchers:

• Could be used until your child turned 15 (16 if disabled).
• Only approved childcare providers could be paid with them.
• Non-refundable, so you had to be careful not to over-buy.
• Not available to the self-employed.
• Could affect your tax credits entitlement.

⚠️ Important: The childcare voucher scheme closed to new entrants in October 2018. If you weren’t already signed up by then, you can no longer join, though existing members can continue as long as their employer offers it.

What is Tax-Free Childcare?

Tax-Free Childcare was introduced in April 2017 and is now the main scheme replacing childcare vouchers. It’s open to far more people, including the self-employed.

How it works:

• You open an online childcare account (through gov.uk).
• For every £8 you pay in, the government tops it up with £2.
• You can get up to £2,000 per year, per child (or £4,000 if your child is disabled).
• You then use the account to pay your approved childcare provider directly.

Who is eligible?

You’re usually eligible if:

• Your child is under 12 (or under 17 if disabled).
• You (and your partner, if you have one) earn at least £167 per week (16 hours at minimum wage, updated April 2024) on average.
• You each earn less than £100,000 per year.
• You’re employed or self-employed in the UK.
• You’re not already receiving childcare vouchers, Universal Credit childcare help, or Tax Credits childcare support.

Parents on certain benefits (such as Carer’s Allowance or Employment and Support Allowance) may still qualify if their partner meets the criteria.

Childcare Vouchers vs Tax-Free Childcare: Which is Better?

This depends on your personal circumstances:

• If you were already in the voucher scheme before October 2018, it may still work out better, especially if you’re a basic-rate taxpayer and don’t spend huge amounts on childcare. You save tax and NI, which is closer to 30% overall.
• If you’re self-employed or a higher earner, vouchers were never an option, so Tax-Free Childcare is your best bet.
• If you spend a lot on childcare, Tax-Free Childcare may offer more support since it applies per child and isn’t capped weekly.
• If you get Universal Credit or Tax Credits, check carefully. Tax-Free Childcare isn’t compatible with these.

The government has a handy childcare calculator to compare which scheme (if you’re still eligible for vouchers) works best for your family.

Final thoughts

Childcare vouchers were once a great way to cut the cost of childcare, but unless you joined before 2018, the scheme is no longer an option. Tax-Free Childcare is now the main support available, and it’s far more flexible – especially for self-employed parents or those with multiple children.

If your child is 3 or 4, don’t forget to check if you also qualify for 30 hours free childcare, which can be combined with Tax-Free Childcare for even bigger savings.

To find out more, visit the government website. Or use their calculator to see which scheme is better for you.