Page last updated at 12:23 GMT, Wednesday, 11 November 2009

Q&A: Childcare voucher scheme

The vouchers are used to pay for Ofsted-registered care

A group of senior MPs are calling for a rethink on plans to scrap the childcare voucher scheme, where parents receive a tax-break on money spent on childcare.

Gordon Brown says this relief is badly targeted and he wants to divert this money to fund nursery places for two-year-olds from less privileged homes.

The BBC News website explains what the scheme involves.

What are childcare vouchers?

The employer supported childcare scheme, as childcare vouchers are officially known, was introduced in 2005. The scheme involves parents "sacrificing" up to £243 of their salary per month before tax and national insurance deductions are made. In exchange, parents receive electronic vouchers to be used to pay for Ofsted-registered childcare. About 340,000 families in the UK are signed up for the scheme.

What are the benefits for parents?

The scheme saves parents money on childcare costs, because they do not pay tax or national insurance on the money "sacrificed" to the scheme. The tax break is equivalent to a 31% saving on up to £243 a month for basic rate taxpayers or 51% for those on the higher rate. The saving can be as much as £1,196 a year. Furthermore, because both parents can sign up for the scheme if their employers offer it, that saving can be doubled per household.

What are the benefits for employers?

The scheme helps employers as it provides an added incentive for people to work for them. Also, employers do not have to pay their national insurance contribution on the money employees allocate to the scheme.

What is happening to them?

At the Labour party conference in September, Gordon Brown announced his intention to phase out tax relief on childcare vouchers over the next six years. Mr Brown said no new entrants to the scheme would be accepted after 2011. The voucher scheme would then be stopped for all participants in 2015.

Why is he doing this?

Mr Brown says about a third of the benefit of childcare vouchers goes to higher rate taxpayers. He says the money saved will be channelled into funding 10 hours a week of free childcare for two-year-olds from less advantaged backgrounds.

What do parents say about this?

Obviously, people who use the scheme are angered because they will lose the financial benefits on offer. More than 75,000 people have signed a petition on the Downing Street website calling for a rethink.

Why are MPs concerned?

In short, Labour MPs are worried Mr Brown's move could increase the chances of them losing them their seats at the election. In a letter to the prime minister, 43 MPs - including nine ex-ministers - said withdrawing the vouchers would penalise a significant number of lower rate taxpayers, reduce the overall amount of funding available for childcare and damage support for Labour. They also warned it could impact negatively on the economy. The MPs have also signed a Commons motion warning the move would exacerbate the gender pay gap, lessen opportunities and incentives for two parents to work and make childcare less affordable.

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