March, 2017

52 Ways to Save Tax #30

Pay less tax

Pay less tax

Childcare vouchers allow you to pay for your childcare from your pre-tax salary. If you pay for childcare, you could save hundreds of pounds a year by using the voucher scheme.

In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of tax that you pay by using childcare vouchers.

52 Ways to Save Tax – Part 30: Use childcare vouchers

If you have children aged up to 15, you could save over £1,000 each year by using childcare vouchers. While they are only available through employers, they let you pay for childcare out of your pre-tax and National Insurance (NI) income.

This may not sound like a big deal, but it could save you hundreds of pounds.

The process works on ‘salary sacrifice’. Here’s an example:

  • You give up £1,000 of salary which, after tax and National Insurance is only worth around £700 to you if you’re a basic rate tax payer
  • In return for giving up £1,000 of salary, you get £1,000 worth of childcare vouchers
  • By taking the vouchers you are £300 better off

If you’re a basic rate taxpayer, you can pay for up to £243 of childcare each month with vouchers (£55 per week). This is per parent, and so if you are both working you can get £486 of childcare vouchers each month.

The limit to the amount of vouchers you can buy is:

  • Basic rate (20%) taxpayer – £55/week, maximum annual tax/NI saving £930
  • Higher rate (40%) taxpayer – £28/week, maximum annual tax/NI saving £630
  • Top rate (45%) taxpayer – £25/week, maximum annual tax/NI saving £590

Remember that these limits are per parent. And, the number of children you have doesn’t affect the amount of childcare vouchers that you can buy. If the vouchers don’t cover the cost of childcare, you pay the childminder directly for the difference.

Vouchers are typically non-refundable, so don’t buy more than you need. However, they do normally last for a long time and so you can save them up to use during holiday times when the cost of childcare may be greater. Many providers will also allow you to backdate vouchers although your child must be born for you to be able to sign up.

You can use vouchers to pay for childcare up to 1 September after your child’s 15th birthday (16th birthday if they are disabled). The vouchers can be used at any nursery, nanny, childminder or playgroup who is Ofsted registered.

You can also use vouchers to pay for tuition for your child, as the tutor is providing ‘childcare’ at the same time. The tutor must be Ofsted registered and happy to accept vouchers.