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Spend & Save

Help for families to meet costs of childcare costs

The Chancellor has brought in a tax-free scheme but it won't arrive until 2015 and may leave some parents worse off

Childcare costs are one of the biggest burdens on families in Britain, with prices rising far beyond inflation and the pockets of most parents. In recognition of the impact on household finances, last week's Budget included help in the shape of a new tax-free scheme, worth up to £1,200 per child. But there is a catch – it won't be introduced until autumn 2015.

British parents pay some of the highest fees in the world. A full-time nursery place for a toddler now costs a colossal £11,000 a year, according to Childcare Costs Survey 2013 from the Daycare Trust and the Family and Parenting Institute. At the top end, the most expensive nursery in Britain costs an unbelievable £42,000 for full-time care, a far cry from the average salary of £26,500. The pain doesn't end when the kids go to school either, as after-school club fees have seen the steepest price hikes, rising by 9 per cent to just shy of £50 for 15 hours a week.

"Everyone expects bringing up children to cost money, but the amount parents are paying for childcare just doesn't add up. Being expected to pay £11,000 for childcare – not far off half of the average wage – is unrealistic and it's no wonder so many parents find that work doesn't pay," says Anand Shukla, the chief executive of Daycare Trust and the Family and Parenting Institute.

Today, working parents looking for a financial boost have an Employer Supported Childcare scheme. This enables them to exchange up to £243 of their gross salary for childcare vouchers, which are exempt from tax and national insurance contributions, saving basic-rate taxpayers up to £933 a year. In April 2011, new joiners paying higher, or top rate tax, saw their allowance fall from £55 per week to £28 and £22 per week so that all taxpayers have roughly the same potential gain.

The scheme has been available since 1998 but the industry has criticised the fact that parents have to rely on companies offering it as an employee benefit. Fewer than 5 per cent of businesses do so, helping around 500,000 households, while the self-employed are ignored.

Instead of tweaking the system, the Government has earmarked around £750m for a new voucher scheme. Initially it will only be available to children under five, but once running, working parents with children under 12 will receive 20 per cent, the basic rate of tax, of their yearly childcare costs (of up to £6,000 per child). Eventually, this is expected to help 2.5 million working families. The details have yet to be ironed out, but parents will be able to set up an online account with a voucher provider and the government will top up payments for any Ofsted-regulated childcare in England and the equivalent bodies in Scotland, Wales and Northern Ireland. For example, if you pay £400 a month in nursery fees you would pay £320 into the account and the government would cover the final £80, saving you £960 over the year.

"The new scheme is a great idea as more parents will be able to access help with their childcare costs especially those on low wages, the self-employed and those whose employers have not joined the childcare voucher scheme," says Jo Dalby from childcare provider BusyBees.

Parents must each earn less than £150,000 a year to qualify, so a family with two working parents could earn up to £299,998 a year and still join the new system. Parents will not be eligible if they receive support through tax credits and, in due course, Universal Credit. Parents must work at least 16 hours a week so families with a stay-at-home mum or dad will not receive the payments and single parents must also be in work.

Early criticism has been focused on the fact that parents not working in order to look after their kids have been left out and crucially, that not every family will be better off under the new scheme. Today, any working parent may be eligible to sacrifice their salary for childcare vouchers, but under the new system both parents need to be working to be eligible for support. Families with two parents earning could equally lose out because they will no longer be able to individually claim for the vouchers. Furthermore, parents can currently use childcare vouchers for children up to 15 years of age, whereas the new scheme will initially only be open to under-fives.

"The Government thinks it has to do something radical but what it is proposing is potentially less than what's being offered now," says Iain McMath from childcare voucher provider Sodexo Motivation Solutions. "If you are thinking about the squeezed middle I think it's going to be problematic."

Even for parents who will benefit, industry figures say they need this help now, not in two years' time, but parents will actually be able to stay on the existing system. If you are receiving childcare vouchers you will not be forced to join the new scheme if it means you will lose out financially, although it will be replaced for new entrants after the launch.

So, to protect yourself, sign up for the scheme and choose to stick with it, or switch to the new one from 2015 if it's better for you. If your employer doesn't offer the present ESC scheme you can lobby them to join.

It's also vital to make the most of any financial help available such as the free 15 hours that three to five-year-olds are entitled to each week. Parents with children under two don't qualify, although free places are due to be extended to 40 per cent of two-year-olds from 2014. Until it is replaced by Universal Credit in October, the childcare element of Working Tax credit, where each parent works 16 hours or more, saves families 70 per cent of their childcare costs, up to a weekly cap of £175 for one child or £300 for two or more. If your household income is below £42,000 you are likely to qualify for child tax credits. Once Universal Credit comes into play, lower earners will be able to claim up to 85 per cent, rather than 70 per cent, of their costs.

Local councils can also be a handy source of subsidised childcare, particularly during school holidays and equally, churches and leisure centres often provide cheaper childcare.