Last reviewed 16 July 2018

The terms of the new Tax-Free Childcare scheme had originally meant that from 6 April 2018, new entrants to employer provided childcare vouchers schemes would not be permitted. However, this amendment has been deferred by six months until 4 October 2018. Paul Tew, small business consultant and freelance advisor, looks at how this change will impact on the issue of employer provided childcare vouchers and whether it will remain a valued employee benefit in kind.

Changes to childcare vouchers

From 4 October 2018, childcare vouchers will be closed to new entrants. After the closure date, employed parents who are already using childcare vouchers can continue to do so for as long as they remain with their current employer and if their employer continues to offer the scheme. If leaving the employment after 4 October 2018 the individual will not be able to join a new employer’s existing scheme. Employers should write to employees who are currently in a childcare voucher scheme and those going onto and returning from periods of family-related leave to make them aware of the changes.

Therefore, employees must join a childcare voucher scheme before 5 October 2018 in order to take advantage of the tax reliefs that are currently available to participant members. For any employees who applied to join a childcare voucher scheme before 6 April 2011, the tax-free limit is £55 a week, or £243 a month. For those joining after that date the monetary limit is determined in accordance with the employee’s marginal rate of income tax. Employers need to carry out a “basic earnings assessment” to work out the correct amount.

To be an existing scheme member, the first voucher must have been received before the scheme closes to new entrants. The exception to the “closed to new entrants” rule is where the change of employment is as a result of a transfer of employees made under a TUPE arrangement. As long as an individual remains eligible for the childcare voucher scheme, then the monetary value of childcare vouchers received can be changed in accordance with the employer’s scheme rules.

Managing childcare vouchers

The most tax efficient way of providing vouchers is in conjunction with a salary sacrifice scheme operated through the payroll (most employers use their National Insurance savings to fund the operation of the scheme). As qualifying childcare vouchers are an excluded exemption, the optional remuneration arrangement rules do not apply, and vouchers for childcare continue to be covered by the pre-6 April 2017 exemptions from income tax.

Employers have two options for managing childcare vouchers.

  1. Use a childcare voucher provider: a voucher provider can operate a childcare voucher on behalf of an employer and will usually charge an administration fee for the service and be responsible for the correct deduction of tax and payment of National Insurance contributions (NICs).

  2. Operate the childcare voucher scheme internally: oversee the management of childcare vouchers for employees ensuring that the conditions for tax and NICs exemption are met and keeping records to support the scheme.

The second option is the cheapest but does involve a certain amount of administrative time depending on the numbers involved.

Introduction of the Tax-Free Childcare Scheme

The removal of workplace childcare vouchers is to make way for the Government’s Tax-Free Childcare scheme, which was introduced from April 2017. This new scheme does not work in the same way as childcare vouchers, as it is not administered by employers, but through a Government sponsored online account. The Government will provide 20% support on childcare costs up to £10,000 per year for each child. This is equivalent of the tax most people pay, that is the basic rate of 20%, which gives the new scheme its name, “tax-free”.

An employer can also choose to pay into an employee’s childcare account on a voluntary basis, but this would create a financial cost and additional administration time, so this option needs to be considered carefully before making a contractual commitment to make payments. These payments will be liable to both PAYE tax and NICs as the employer is effectively giving cash to pay for an employee’s childcare costs.

Some parents who were eligible to receive childcare vouchers are not entitled to join the new scheme and vice versa. For example, the new Tax-Free Childcare scheme is only applicable if both parents are in work or getting parental leave, sick leave or annual leave and each earn at least the National Minimum Wage or Living Wage for 16 hours a week. The new Tax-Free Childcare scheme is particularly beneficial for parents with more than a single child and with high childcare costs. The financial help available increases with the number of children, whereas there is a tax-free monetary limit for childcare vouchers which is per employee, not per child, nor per family.

Employees have a decision to make

Whether or not an employee is better off under an existing childcare voucher scheme or under the new Tax-Free Childcare scheme will depend on the employee’s own personal circumstances — it is not a decision for an employer to get involved with. However, a family cannot use both schemes at the same time. So, an individual will not be eligible to stay in their employer’s childcare vouchers scheme if their partner is in the Tax-Free Childcare scheme.

If there are employees interested in childcare benefits then as a first step ask the individual to complete a calculator, which will work out eligibility and the amount that could be received under a childcare vouchers scheme and under Tax-Free Childcare. If most people are financially better off under Tax-Free Childcare, then setting up a new voucher scheme or continuing with an existing scheme might prove costly for just a few people.

If an employee receiving childcare vouchers elects to opt into Tax-Free Childcare, then the employee must inform their employer within 90 days, after which point no more vouchers can be issued. The employee will need to provide their employer with a written document (which can be an email) stating that they wish to leave their employer’s voucher scheme and use Tax-Free Childcare.

Once the decision has been made to join the Tax-Free Childcare scheme, the employee cannot then change their mind and rejoin the childcare vouchers scheme. If an individual has already received vouchers, then these can be used after 4 October 2018, as there is no deadline for using these vouchers, although some employers may place restrictions on using the vouchers after the employment ends.

The current 52-week rule will still apply to existing scheme members, which allows a break from receiving childcare vouchers for up to 52 weeks, for instance, when taking an unpaid career break. If, when the scheme closes to new entrants on 4 October 2018, an individual employee has not received childcare vouchers within the last 52 weeks, then he or she must be in receipt of new vouchers on or before 4 October 2018 to remain eligible to stay in the voucher scheme.

Workplace nurseries will be unaffected. If an employee meets the eligibility requirements for Tax-Free Childcare, they will be able to access a workplace nursery and receive Tax-Free Childcare, for example, if the child attends qualifying childcare outside of that time that they are in the workplace nursery.


1. Make sure that your employees know that childcare vouchers are closing to new entrants on 4 October 2018, particularly recent starters and those returning from family-related leave.

2. Although there is no legal requirement for you to play any role in Tax-Free Childcare, you can, if you want to, act as a source of information on the scheme, for example by referring employees to the Government web portal for advice.

3. If you choose to discontinue providing childcare vouchers to your workforce, each working parent must enrol in the Tax-Free Childcare scheme or childcare costs will not be paid by the Government.