Save money on childcare

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As any working parent knows, childcare can be a costly. Working families in Britain pay more on childcare in the UK than any other country in the developed world (almost four times the cost in Germany and three times that of France), which accounts for about a third of household spend.

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The average cost of a nursery place for under-twos is £167 a week and can be as high as £375 a week in central London. That adds up to more than £18,000 a year.

Thankfully there are some schemes that may help lessen the expense, depending on your individual family circumstances. Read on to see if you quality for childcare vouchers or childcare extra tax credits...

Childcare vouchers
This is a special government scheme for parents with children aged up to 15 operated through employers, with many companies (big and small) taking part.

It's basically a salary-sacrifice scheme, so that your employer pays toward childcare out of your pre-tax and national insurance income – i.e. your employer pays a certain amount of money directly to your registered childminder or nursery, rather than paying it into your bank account.

It may not sound like much, but the benefits can be great. Say for example you give up £1,000 of salary – that's worth about £700 in your pocket but you get £1,000 of childcare vouchers. This means you're £300 better off each month.

The maximum amount you can claim in vouchers per month is £243 – but that's each. Jointly, both parents (if basic rate tax payers or higher/top payers who joined the scheme before 5 Apr 2011) can claim vouchers worth £486 per month.

Those joining the scheme after 6 Apr 2011 on a higher or top rate tax had their allowance dropped from £55 per week to £28 and £22 weekly limit.

Once you no longer need to pay for childcare you simply inform your employer and the money is paid direct as salary again.

To find out exactly how much you can save, try using one of the calculators at www.computersharevoucherservices.com.

First though, check to see whether you're eligible for tax credits.

Do you qualify for extra tax credits?
If you're currently working and paying for childcare you may be able to get tax credit to help work with the cost. If you're a single parent you must work 16 hours or more a week to claim.

If you're part of a couple you both need to work for 16 hours or more a week (in some circumstances only one of you needs to work for 16 hours a week, for example if one of you is off sick or disabled and claiming disability benefits, in hospital or severing a custodial sentence in prison).

Childcare must be provided through a registered or approved individual or company and can include nurseries, childminders, foster carers, out of school hours clubs and nannies.

You can claim as much as 70 per cent of your childcare costs, depending on your earnings (the lower your income, the more tax credits you will be entitled to). If you pay childcare for one child, the maximum childcare cost you can claim is £122.50 a week for one child and £210 a week for two or more children.

There is no set income limit for help with childcare costs. But as a general guide, if you're a couple with one child, paying £175 a week for childcare, you'll still get some tax credits if your annual income is as high as £41,000.

For more information, and to use an online tax credit calculator, visit: www.direct.gov.uk.

Childcare vouchers or tax credits?
If your employer pays only some of your childcare cost in vouchers, you can make a claim for the rest of the cost. Beware though, as you may be better off NOT taking the vouchers as they can impact on the amount of Childcare Tax Credits you're entitled to, especially families on lower incomes.

This happens because the more you pay in childcare, the more tax credits you're eligible for, but any amount you pay in vouchers, doesn't count towards that. For example if you pay £200 a week for childcare, but use £120 of vouchers, for tax credit purposes you're only spending £80 a week on childcare, so it's this figure you must enter on your Tax Credit claim form.

You can find out whether you're better off or not by using the calculator at: http://www.hmrc.gov.uk/calcs/ccin.htm.

To find out more about childcare vouchers and tax credits visit www.direct.gov.uk or read the advice of finance expert Martin Lewis at: www.moneysavingexpert.com.