Childcare vouchers debate - campaigners issue warning

Following yesterday's announcement by the Government on tax relief for childcare vouchers, campaigners for people on low incomes have warned that many people are losing out by taking up vouchers when they would be better off taking up tax credits.

John Andrews, chairman of the Low Incomes Tax Reform Group (LITRG), said: "The Low Incomes Tax Reform Group has regularly raised concerns over the way childcare vouchers are sometimes taken up by people who would be better off claiming tax credits. Vouchers may seem attractive but, tax-exempt or not, by taking them up some low paid people are ending up out of pocket, because of the complicated way in which they interact with tax credits. This can particularly arise with salary sacrifice arrangements.

"This is because, firstly, parents cannot claim childcare support through tax credits on childcare costs covered by the vouchers. For example, if you have childcare costs of £155 a week and get vouchers of £55, you can only claim your eligible childcare costs as £100 for tax credit purposes. Although taking the vouchers gives some national insurance and tax gains, you lose the 80% subsidy that comes with tax credits. Therefore parents must do a complicated calculation to see which is better for them.

"And second, parents must tell HMRC if they start to get childcare vouchers because it will mean their eligible childcare costs are likely to have changed by £10 a week or more. Failure to do so can mean large overpayments are created, which HMRC will try to recover, and a possible penalty of £300 for failure to report a change of circumstances.

"There is precious little information to help people make the right choice between vouchers and tax credits. Both the Government and the voucher companies are failing to provide people with the information they need to make the right decision for themselves.

"Whatever decisions are made by the Government about tax relief on vouchers we think one of the most important steps needed is for HM Revenue and Customs to ensure that the tax benefits are clearly and simply spelled out to all those considering taking up childcare vouchers."

"No-one should be left worse off if they take childcare vouchers under whatever regime is put in place by the Government."