tax credits vs childcare vouchers

[whatsmyname2017]

Am in process of separation. I currently use childcare vouchers from work to pay childcare but looks like I would be better off using tax credits. Can someone just explain this to me? Do tax credits pay the provider directly? They won't pay 100% of childcare so how do I pay the difference? Why can't I use childcare vouchers to pay the difference?

Tax credits come to you through your pay packet. If tax credits do not cover your childcare you have to pay the difference yourself. You can use childcare vouchers to pay for the difference but they will reduce your entitlement to tax credits since that is based on the amount you pay in cash, not vouchers.

To give a simplified example (taken from moneysavingexpert.com)...

The Joneses are entitled to 70% of their childcare costs in tax credits. Pay £100 in cash a week - they get £70 of tax credits. Pay £50 in cash and £50 in vouchers (which they had to buy) and they’re only entitled to 70% of £50 paid in cash, which is £35 of tax credits.

In the first scenario, they meet only £30 of the total childcare costs from their own pocket. But in the second scenario, they've had to buy the childcare voucher (which would have cost them around £35 - the rest is tax/NI savings) plus they'd pay £15 of the rest of the costs, £50 in total. So, in this scenario, the Joneses would have been better off not using the vouchers.

You have presumably sacrificed some salary to take childcare vouchers. If you stop taking the vouchers your salary should go up to its previous level. That is the money you would use to pay for the difference between the tax credit and the actual cost of childcare.

Thank you - that has explained it brilliantly!