The Tax-Free Childcare Scheme explained

If you're a working parent paying for childcare, find out what the new tax-free childcare support scheme means for your family finances.

What is it?
The Tax-Free Childcare Scheme is a money-back scheme whereby working parents can get 20% of the cost of their annual childcare costs up to a maximum of £1,200 a child.

When does it start?
Late 2015.

Who gets it?
Working families where both parents work or one parent works in single-parent families. The scheme will initially be for parents of children under the age of five, but it's the government's intention to extend that eventually to parents of children under the age of 12. The scheme applies equally to employed and self-employed parents.

If parents are eligible to receive tax-free childcare before they go on maternity or paternity leave, they will continue to be eligible throughout the maternity/paternity period

Are there any restrictions?
Yes each parent must earn less than £150,000 a year. So two parents in one family each earning £149,999 will still be eligible.

Who won't get it?
Parents who are currently eligible for tax credits (soon to be Universal Credit) will not be eligible. Also, families with two parents where just one parent works will not be eligible. A spokesperson for the Deputy Prime Minister's Office told us that they expect some exemptions to apply, "for example, where one parent is unable to work as they are a carer or disabled," or where one parent is in full-time education. The government has said it will "consult on whether other circumstances should be taken into account".

So ... what if you receive Tax Credits/Universal Credit?
Currently the childcare element of the Working Tax Credit (which will become part of Universal Credit, due to be phased in from next month) covers a maximum of 70% of childcare costs (down from 80% under the last government). As part of the new initiative, parents in receipt of universal credit will have 85% of their childcare costs met, as long as both parents are in work and earning more than £10,000 (the level of the personal tax threshold in 2015).

Those receiving universal credit who don't earn that amount will continue to have 70% of their childcare costs covered (ie no change from now).

Are there any particular winners and losers?
Under the current Childcare Vouchers system, parents can exchange up to £243 of their gross salary per month for vouchers, which cover all forms of childcare up to the age of 16 and are exempt from tax and NI contributions. This means that parents in the basic rate tax bracket can save up to £933 a year, those in the higher bracket up to £623, and anyone earning over £150,000 up to £606. The maximum any family can save is £1,866 - if both parents' employers offer a voucher scheme, and both are basic rate taxpayers.

Currently, only 5% of companies support the Employment Supported Childcare Scheme (ESC, aka childcare vouchers). From 2015, the tax-free childcare scheme will be compulsory for employers.

Under the new scheme, parents can claim £1,200 per child, per year, towards the cost of childcare. This means a potential loss of £660 a year for those families currently saving £1,866 (ie basic rate tax payers with one child)*, but gains for families of basic rate tax payers with more than one child, and for higher-rate tax payers, because unlike the current childcare vouchers, the new scheme won't be means-tested.

*This only applies to people joining the new scheme after 2015. No-one currently receiving childcare vouchers will be forced to join the new scheme if it means they will lose out. 

How is it administered?
The new scheme will be an online voucher system that you register to use. 

Parents will be able to open an online voucher account with a voucher provider and have their payments topped up by the government. For every 80p families pay in, the government will put in 20p up to the annual limit on costs for each child.

Parents will be able to use the vouchers for any Ofsted regulated childcare in England, and the equivalent bodies in Scotland, Wales and Northern Ireland.

How is the government paying for the new scheme?
Cutting the Employment Supported Childcare Scheme (childcare vouchers) currently being used by 450,000 families is partly funding the new tax-free childcare scheme.

What happens between now and 2015, when the new scheme comes into force?
Working parents can still join ESC from now until 2015.

• Share your views about the new scheme
• Treasury press release on the tax-free childcare scheme
• See all family money content