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Prime Minister's plans for free childcare for less well off could sound the death knell for existing childcare tax relief

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The prime minister's shock announcement that the Government will provide free childcare for a quarter of the UK's two and three-year olds could spell the death knell for childcare vouchers by ending tax breaks on childcare.

Speaking at the Labour Party Conference in Brighton, Gordon Brown promised to provide 10 hours of free childcare a week for 250,000 two-year olds from families "on modest or middle incomes", within five years.

According to BBC reports, the plans will be paid for by scrapping existing tax relief on childcare, which currently can save basic rate taxpayers as much as £962 a year, rising to £1,195 for top rate payers.

The BBC's deputy political editor, James Lansdale, said: "Mr Brown has just promised free childcare for two-year olds from less well off families. What he didn't say is that it won't happen for five years and that it will be funded by cutting childcare tax subsidies for those who are a little better off. Some will say this is hardly support for the middle classes."

Commenting on the shock announcement, Marc Woolfson, account director at Westminster Advisers, told HR magazine 340,000 parents and 35,000 employers currently use tax-efficient childcare vouchers and a report earlier this year from the Department of Children Schools and Families found such vouchers were "very popular" with parents and employers.

And a joint statement from four childcare providers Accor Services UK, Computershare Vouchers Services (formerly called Busy Bees Childcare Vouchers), Grass Roots Group and Sodexo Pass, said: "We believe that the government must protect this essential support for working parents and businesses in the UK. As we move towards recovery from recession, this is not the time to be making life harder for hundreds of thousands of families. Britain's ‘squeezed middle' rely on tax exempt childcare vouchers to help pay for quality childcare."  

But another commentator on the BBC's website, Scott Robinson from Bournemouth, added: "The fact that Brown is cutting childcare tax credits makes me sick. My wife and I are not high earners, and rely on them. I think this is the straw that broke the camel's back for me. I will be voting Tory."

In other news, the prime minister announced the National Minimum Wage, now 60% higher than when it launched in 1999, would increase every year for the next five years.

He also promised investment in schools and the skills of young people, including 20,000 more internships in small businesses and green business.