22 July 2019

Cost of losing childcare vouchers could run into thousands for parents of school children

4 min read

 
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Becky O'Connor

Personal Finance Specialist

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Hundreds of thousands of working parents who receive childcare vouchers could lose out on tax savings worth thousands of pounds over their children’s school careers if they switch over to the new government Tax-Free Childcare (TFC) scheme, new analysis from Royal London has revealed.

As the summer holidays approach, the mutual insurer is warning that a family with two school-age children and two basic-rate taxpaying parents who both receive childcare vouchers could miss out by more than £10,000[1] between when their children are 5 and 16 if they switch from vouchers to TFC.

Royal London is urging all parents who are currently eligible for vouchers to only swap to TFC if they have worked out that it is better value for their circumstances or if they have no choice, as for many – particularly those with ad hoc after school and holiday-only childcare costs - childcare vouchers are a more generous benefit.

Becky O’Connor, personal finance specialist at Royal London, said:

“Sometimes you don’t know what you’ve got till it’s gone and that might well be the case for parents who lose or give up their entitlement to childcare vouchers.

“Families need to make sure they are not missing out on thousands of pounds in tax savings because of a complex and changing system.”

“Those who work out they are better off on vouchers need to ensure they remain eligible by continuing to order them every year, or risk losing out on this great employee benefit forever.”

“But some help is better than none and if you find you are only eligible for TFC, make sure you claim it.”

Where there is a choice, who is better or worse off on childcare vouchers when paying typical after-school and holiday club costs (£3,500 per child) from age 5 to 16?

Two child family has... Better off on vouchers or TFC?
Two basic rate taxpayer parents with vouchers  Vouchers
One basic-rate parent with vouchers Vouchers
Two higher rate parent with vouchers Vouchers
One higher rate parent with vouchers Tax-Free Childcare

The Government closed the voucher scheme to new applicants in October 2018 to make way for TFC. Only parents who were already receiving vouchers before this date are still eligible. Parents lose eligibility if they either leave their employer, fail to order vouchers within a 12-month period or voluntarily switch to TFC.

In particular, basic-rate taxpaying parents with school age children are more likely to lose out from losing their vouchers entitlement because of differences in the way the schemes are structured.

Vouchers are a fixed pounds and pence yearly benefit to employees of participating companies, worth up to £933 per parent (basic rate taxpayer) or £625 per parent (higher rate) up to age 15.

TFC is paid per child as a proportion of childcare costs, up to £2,000 a year until the child is 11, so the amount of benefit received depends on the amount of childcare used.

TFC tends to work out as better value for families with high childcare costs, more than two children or a parent who is self-employed and couldn’t previously access vouchers.

Notes to editors:

1. For two basic-rate taxpayer parents, childcare vouchers result in additional savings compared with TFC of around £460 a year from age 5 to 11 and £1,866 a year for a further four years from 12 to 15. Calculation based on after-school and holiday club childcare costs of £3,500 per child per year (CORAM Family and Childcare Trust figures)

2. An estimated 780,000 parents are in receipt of childcare vouchers, according to the Childcare Voucher Providers Association, of which 80 per cent are likely to be basic-rate taxpayers.

For further information please contact:

Becky O’Connor, Personal Finance Specialist

About Royal London:

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £130 billion, 8.8 million policies in force and 4,046 employees. Figures quoted are as at June 2019.