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Prime minister fails to convince the industry on changes to childcare voucher tax breaks

The prime minister has denied the Government will scrap childcare vouchers and has maintained the tax credits low and middle-income parents will receive are better than the tax efficiencies on childcare vouchers.

But Gordon Brown confirmed the Treasury would be phasing out tax and National Insurance efficiencies on the perk.

Responding to a petition from working parents campaigning for childcare vouchers not to lose their tax efficiencies, which was suggested by the prime minister in his speech at the Labour Party Conference, Brown said:  "I can see that childcare vouchers are a big concern to many of you, so let me take this opportunity to clear a few things up.

"No one who is currently using the scheme will be affected in the next five years, so please don't worry about any sudden changes. We are phasing in the changes so that families who currently benefit don't lose out in the next Parliament.

"Low and middle-income working parents will be able to benefit from childcare support through tax credits that are worth on average £68 per week for 470,000 families - much more generous than tax relief on vouchers.

"And we are not actually abolishing the childcare vouchers. What will happen is the Treasury will be phasing out the tax and National Insurance relief employees receive for childcare vouchers, but companies will still be able to offer childcare vouchers to the people they employ and, in fact, we expect many of them will continue to provide support for childcare."

The prime minister added he was proposing these changes because tax relief is currently "badly targeted".  And he said approximately a third of the benefit of childcare tax efficiencies goes to the 6% of parents who pay tax at the higher rate. 

He added: More importantly, we want to use the money to extend free nursery places to many thousands more two-year-olds. These nursery places are popular with parents and they give children the very best start in life - helping to achieve a fairer society in which everyone can thrive."

But Marcus Barrow, managing director of Apple Childcare Vouchers, told HR magazine: "The tax credits system is designed to help low-income families, whilst childcare vouchers support a far wider audience. The way that the current system works with the tax credits and the childcare vouchers means that all parents, regardless of income can make savings of over £1000 per year on their childcare fees, which is vital in the current economic climate.

"How can tax credits be ‘much more generous than tax relief on vouchers'? Only for those that benefit from tax credits of course. There is already the, ‘tax credits versus childcare vouchers' question that parents have to answer.

"Many parents who are currently entitled to tax credits, and in particular the childcare element of the tax credits, do not use childcare vouchers, because if they did, their tax credits would be reduced. Therefore, even if the tax credits are increased the majority of parents who are currently using childcare vouchers will lose out substantially as they will not qualify for the tax credits.
 
"I believe this will hit almost all who are currently receiving childcare vouchers but in particular, it will really hit the middle-income bracket, those parents who are just above the household income level to qualify for the tax credits. Many parents only just cover their annual childcare cost through going back to work. If this planned changed is implemented many will be asking the question, "Is it worth working?" and may decide to stay at home rather than send their children to nursery. This will have a huge impact on the childcare sector also."