Basic rate taxpayers will continue to be exempt from all tax and National Insurance Contributions but in future higher rate tax payers who currently receive tax relief at 40 per cent will have the benefit halved.
Gordon Brown said this was to ensure that the scheme was fairer for all families.
He had wanted to end tax relief on childcare vouchers from 2015, believing it was badly targeted and that better off families were the main beneficiaries.
From April 2011 higher rate tax payers joining a scheme will be entitled to income tax relief worth exactly the same as basic rate taxpayers.
Gordon Brown had faced a revolt from former ministers and MPs over the proposal and more than 92,000 people signed a petition on the Downing Street website.
In a letter to MPs Roberta Blackman Woods and Fiona Mactaggart yesterday, he wrote, 'I have already made clear that no family currently in receipt of tax relief for their childcare vouchers will see any change in the support they receive. But following our discussions I can now also say that we will retain tax relief for new childcare vouchers issued in the future.
However, there still remains a concern that a disproportionate benefit is accruing to higher rate taxpayers.
So in order to ensure that this tax relief is given on a fairer basis to all families, we will ensure that all taxpayers get the same income tax relief as basic rate taxpayers do currently.
This will take place from April 2011 and will not affect those receiving vouchers issued before that date.'
He reiterated the Government's commitment to expand the number of childcare places for two-year-olds but said that this would now take place at a slower rate.
Simon Moore, managing director of Computershare Voucher Services (CVS) said, 'CVS welcomes this move by the Government and we would like to thank them for making a decision that will benefit parents, businesses and childcare providers.
The response we have to the threat to cut this vital benefit reflects how valuable they are to hard working families in every corner of Britain.
'Our research revealed that the plans as proposed would have left 57 per cent of parents unable to maintain their existing childcare arrangements and forced to reconsider their decision to work.
This is a great day for working parents; I would like to applaud the Prime Minister for listening and thank everyone who has supported us in our campaign.'
