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Low income parents 'better off' sticking with childcare voucher schemes, says tax expert

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Parents on low incomes may benefit more financially from staying in their employer childcare voucher schemes than switching to the Government's proposed self-administered scheme.

Deloitte tax partner Mark Groom told HR magazine that due to a quirk in the childcare rules, the proposed £2,000 per child tax break David Cameron announced on Tuesday may not be the boost it first appears to all working parents.

Under the new rules, tax relief for childcare will increase from £1,200 per child to £2,000 per child. The Government is giving parents the option to stick with their employer childcare voucher plan instead of switching to the new scheme. This offer lasts for as long as the employer childcare voucher scheme is still running.

Groom said for some basic rate taxpayers, sticking to the childcare vouchers scheme would be more beneficial than the new scheme, despite the increased tax breaks.

Under the current system, if both parents are basic rate taxpayers they can benefit from tax relief on up to £110 per week (£5,720 per annum) in childcare vouchers, which amounts to a maximum tax saving of £1,830.

Under the new system, parents on the basic tax rate would need to spend at least £7,321 in a year on childcare to save as much.

"Those basic rate taxpayers joining the new scheme, but spending less than £5,720 may be better off staying in their existing childcare voucher scheme, while those spending between £5,720 and £7,321 would be worse off if they switch from childcare voucher scheme to the new scheme in 2015,” Groom said.

Groom said the new scheme means the childcare benefits will be much more widely available than before.

“Currently, only employees whose employers provide either childcare vouchers or workplace nurseries can benefit," he said. "From autumn 2015, the new scheme will be administered by parents opening an online account through the government website. This will open the relief up to the self-employed as well as those employees whose employers do not currently provide assistance with childcare.”