The new funding system will replace the current salary sacrifice scheme that is used by around 500,000 working parents and will see employees pay 80% of their childcare costs (up to £6,000 per child) and the Government subsidise the remaining 20%.
Under the new funding scheme, parents will be able to choose their own voucher provider, as it will not be a salary sacrifice scheme operated through their employer.
The Government hopes this will remove the administrative work that surrounds the current childcare voucher scheme, as employers will no longer need to make the deductions from their employees' salaries.
The scheme will be available to those on minimum wage and who are self-employed, both of which are current limitations with the Childcare Voucher scheme. It will be launched in April 2015.
Work/life organisation, Working Families welcomed the news but said it was "concerned that three groups of parents" may miss out.
Its chief executive Sarah Jackson said under the current scheme, employer supported vouchers "filled a gap" in childcare support by helping families when one parent was studying or retraining or one parent was made redudant. Jackson said she worried that under new system will be limited to families with all parents in work.
She said: "It seems strange that low income families remain in a means-tested scheme, while higher income families get a non-means-tested system. We're also keen to see childcare costs covered for parents of older children."
John Woodward, managing director of Busy Bees, said: "The new system will not only save recipients more money compared to childcare vouchers but it is also estimated will benefit around twice as many working parents."
He added that although businesses will no longer be a part of the chain in supporting parents with childcare costs, it is still in their interest to communicate with employees about the potential savings available to them and the introduction of the new funding scheme.
Iain McMath, managing director of leading childcare voucher provider Sodexo Motivation Solutions welcomed the news. He said: "We are particularly pleased to learn that the vouchers will be made universally available to working parents - whether self-employed or not."
"However, in the midst of the recession, the Government should be doing everything it can to encourage parents back into full time work right now. Instead, it has chosen to dangle a carrot that is two years out of reach, with a solution that won’t leave parents dramatically better off.”
Those organisations, which do not currently have a scheme in place, are still able to set one up and enable their company and staff to take advantage of savings available as well as giving parents the option when available to the most tax efficient method of paying their childcare fees.