From 28 April 2017, a new Tax Free Childcare scheme will gradually replace the existing arrangements for employer supported childcare (aka ‘childcare vouchers’).  Until April 2018, parents are able to register for either scheme (but not both).  After April 2018, childcare vouchers will no longer be available for new registrations, although those already in a voucher scheme at that time will be able to stay in it.

In this section, we explain the workings of both the original scheme and its replacement.   Broadly speaking, the higher a family’s childcare costs, the more attractive the new scheme will be.  The original voucher scheme is likely to suit employed parents with one child (because the relief is per parent, not per child), while the new tax free childcare scheme will tend to suit parents with more than one child.  However, the eligibility rules are different for the two schemes and it is important to understand the detail in order to make the right choice.


The original scheme (Employer Supported Childcare, or Childcare Vouchers)


Anyone who is employed (but not the self employed) can, with their employer’s agreement, opt to sacrifice an amount of salary (up to £243 per month for basic rate taxpayers or £124 per month for those paying higher rate) and receive, instead, a childcare voucher for the same value.

The advantage of this is that tax and NI (and employer’s NI too, which is the bonus for the employer) are calculated on the reduced salary, whereas the childcare voucher is not treated as a taxable benefit.  In effect, therefore, the employee gets tax and NI relief (32% for a basic rate taxpayer) on the amount sacrificed.

In the tables below, the one on the left shows the effect of monthly childcare costs of, say, £500 on a basic rate taxpayer earning £2,000 per month.   Because all of the childcare costs are paid from taxed income, monthly disposable income is reduced to £860.

In the table on the right, the maximum salary sacrifice of £243 reduces the amount on which tax and NI is calculated.   Net pay is lower but, because £243 of the childcare costs have already been paid by way of a tax free voucher, the resulting disposable income is £78 higher.  Over a year, the saving amounts to £933.  For two parents, the saving is £1,866.  For higher rate taxpayers, the monthly limit is reduced to £124 so that the same level of saving is maintained.

Note that the monthly limit applies to each employed parent, not to each child, so that a couple who are both employed and have one child can save 32%  on up to £486 per month.   However, a single parent with three children will be limited to one allowance.



These arrangements offer employers a worthwhile financial saving and are extremely easy to operate. Nevertheless only a small minority of employers participate.

Two different methods are available.  The simplest is for the employer to enter into an agreement with the nursery to buy the agreed monthly amount of childcare on the employee’s behalf.  Typically the employer pays up to £243 (or £124) per month to the nursery by standing order and the employee pays any balance.   No commissions are payable and, for as long as the agreement is in force, the employer also saves national insurance contributions on the amount paid.  However, there need be no fear of being locked in to anything – the employer can opt out of this arrangement and revert to paying the full salary at any time.

Many larger employers, however, don’t want the hassle of making arrangements with a range of different nurseries.   Instead, they can buy childcare vouchers (subject to a commission) from one of the many commercial providers and give them to their staff instead of an equivalent amount of salary.  The employee can then use the vouchers to pay fees at their chosen setting.   This works very much like a gift token, or luncheon voucher, scheme.  Originally vouchers were paper and had to be passed from provider to employee to nursery and back to provider: nowadays, however, the transfers are generally made online.


The new scheme (Tax Free Childcare)

From 28 April 2017, an alternative scheme is available to any family where both parents (or the sole parent in the case of a single parent family) are in work.  Unlike the current scheme, this is not restricted to those in employment but couples where only one parent works will not be eligible.

Each parent must earn at least £115 per week (the equivalent of 16 hours at the legal minimum rate) and there is also an earnings ‘cap’ of £100,000 per year – if either parent earns more than this, the couple will be ineligible.  Eligibility will be verified by HMRC every three months.

This scheme will work a bit like a pension: the parent (or relatives, or the employer) will pay money into a special online account which is ring fenced for childcare.  The government will top up these contributions by £20 for every £80 deposited, up to a maximum government contribution of £2,000 per year.  Importantly, this limit is per child, not per parent.

The government has launched a new website,, where you can find out more about the help on offer and register your interest for the Tax Free Childcare scheme.


Workplace Nurseries

Neither of these schemes should be confused with the more generous, and long standing, arrangements for workplace nurseries.  If an employer actually provides an on-site nursery for its employees to use, and takes an active part in its management, then the provision of free or discounted places (whether in return for a salary sacrifice or not) is not treated as a taxable benefit.





 The 15 hours entitlement for 3 and 4 year olds

The inverted commas around ‘free’ in the title above are intended to convey that, like lunches, there is no such thing as ‘free childcare’.  Someone has to pay for it and, if the government decrees that this should not be the parents, and then pays nurseries less than the going rate, the entitlement ends up being subsidised by the nursery.

All three and four year old children are currently entitled to a ‘free’ nursery place for 570 hours per year.  At Blois Meadow, we offer this either as 11 hours per week throughout the year or as 15 hours per week for the few children who attend only during the 38 weeks of school terms.   It is not practical for us to cater for a variety of different term dates:  to keep things clear and consistent for all parents, we publish details of the 38 weeks in each year for which funding will be provided and for which the ‘funded only’ sessions are available.

The three and four year old entitlement is not means tested and all children are eligible from the start of the term following their third birthday.   Thus:

Children born between 1 Jan and 31 Mar become entitled on 1 Apr

Children born between 1 Apr and 31 Aug become entitled on 1 Sep

Children born between 1 Sep and 31 Dec become entitled on 1 Jan

Settings (nurseries and pre-schools) do not have to participate in the scheme but, if they do, they must offer a certain number of ‘funded only’ places.  In other words, while many working parents need year round day care and treat the funding as a welcome subsidy when it is available, others use the setting only for the free sessions.

Settings claim funding from their local authority to help them provide the free entitlement.  This funding is based on a fixed hourly rate, which is generally well below the rate that the setting charges for non funded children.  Settings may charge whatever they like for any additional hours, as well as for any extras such as food, special activities etc (provided these are genuinely optional).   However, settings are not allowed to charge any additional fees for the actual free entitlement hours, even if this leaves them facing a big shortfall compared with their normal hourly rate.  For this reason, the scheme is deeply unpopular with many nurseries in affluent areas, where rates can be more than double the funding received.

Even at Blois Meadow, where fee rates are relatively low, the government’s underfunding of the free entitlement leaves us having to subsidise this by £1.50 per hour compared to our normal hourly rate.  As a result, although we normally offer discounts for children who attend for our core sessions of 0800-1300, 1300-1800 and 0800-1800, we are not able to extend these discounts to funded children.  Instead, we charge a fixed hourly rate for any time outside the free entitlement hours.

One point which can cause difficulty is what happens to the funding if a child changes settings during the course of a term for which funding has already been claimed.    It is important to understand that this is not the child’s funding: it is a grant paid to the setting to enable it to provide a free place during the relevant term.  As a result, many settings (including Blois Meadow) take the view that, when a child moves during a term, the funding remains with the setting which originally claimed it.  The local authorities are fully aware of, and allow, this policy.


Two year old funding

Settings with a good or outstanding rating from Ofsted and who are approved by the local authority to do so, can also obtain funding to provide a free place for certain two year olds.  This scheme is administered in a very similar way to that described above but, unlike three/four year old funding, it is not a universal entitlement.  It is restricted to families on low income or receiving certain benefits (broadly the same criteria as for free school meals).  Blois Meadow is approved for two year old funding so please ask us if you think you may be eligible or would like to know more.


The extended 30 hours of ‘free’ childcare

This controversial scheme for three and four year olds is expected to launch in September 2017.   What is not commonly realised, however, is that the increase beyond 570 hours pa will not be a universal entitlement.  Like Tax Free Childcare, It will be restricted to families where both parents (or the sole parent in the case of a single parent family) are in work.  Couples where only one parent works will not be eligible.  To qualify for the extra entitlement, each parent must earn at least £115 per week and neither may earn more than £100,000 per year.

Many nurseries are threatening to refuse to participate in the 30 hour entitlement, in the often mistaken belief that it will cause them to sustain losses (as distinct from not making as much profit as they would do if they were able to fill the same places at their normal market rate).   We do not subscribe to this view.  Although the effect of the government’s underfunding will intensify, we expect this to be offset by greater take-up from parents who take only the funded hours.  We intend to participate fully in delivering the extended entitlement, although “funded only” sessions will of course be subject to availability.

You can pre-register to receive more information about the 30 hours at