The consultation, launched today, outlines proposals to give families with children under five and disabled children under 17, 20 per cent of their annual childcare costs, up to £6,000 a year.
However, only households in which both parents work and do not already receive support through tax credits or Universal Credit, when it is introduced, will be eligible.
For the first time, the scheme, which will be ‘phased in’ from Autumn 2015, will include parents who are self-employed.
After the first year, the scheme will be extended to include families with children under 12 years old.
Proposals to introduce tax-free childcare were announced during the 2013 Budget in May, although the plans have now been widened to include people working as carers and those on maternity or paternity leave.
Foster carers will be able to claim tax-free childcare for other non-fostered children who they have responsibility for.
Parents on paid parental leave will only be able to claim for children who were eligible for tax-free childcare before they began their period of leave.
The three-month consultation, which outlines details of how the new system will operate, confirms that parents will have to register with a voucher provider and open an online account. The Government will pay into the account at a rate of 20p for every 80p parents put in.
The Government is also seeking feedback from childcare providers, parents and organisations, on the expansion of the Universal Credit.
In March, the Chancellor announced plans to allocate a further £200m per year to increase the childcare support available under Universal Credit. This is the equivalent to 85 per cent of childcare costs for eligible households, where the lone parent or both parents pay income tax.
Responses to the consultation will feed into the final design of the tax-free childcare scheme.
The Pre-School Learning Alliance has criticised the plans, which it says does not take into account families where one parents chooses to take a career break to bring up their children.
The alliance’s chief executive Neil Leitch said, ‘In the recent More Affordable Childcare document the Government gives a ringing endorsement of those parents who choose to stay at home and look after their children, saying they have 'the Government's full support'. However, when it comes to practical support that's where it stops, with the Government giving priority to a 'get back to work' policy.
‘This tax break does nothing to support those who choose to sacrifice their salary and put their careers on hold to stay at home and look after their young children.
‘We are disappointed that this £1,200 tax break will be dependent on both parents working and flies in the face of pre-election rhetoric where several MPs spoke of ensuring support for families in this way. To now offer this money to a couple whose dual earnings could reach £300,000 but not to a couple earning a fraction of this amount who choose to have one parent stay at home seems perverse.’
He added, ‘We would prefer the Government to properly fund universal childcare provision for all families, regardless of income. Instead, this seems to be more about dangling a £1,200 carrot to tempt mums back to work rather than providing real childcare choices.’
Anand Shukla, Chief Executive, Family and Childcare Trust, said, 'While we applaud the Government for setting aside new funding to ease the financial squeeze on families with young children, and for opening up the scheme to a wider range of working parents, there will be many losers as well as winners under these plans.
'This new financial support for childcare will not be available for the poorest working parents whilst increasing help for those on the highest incomes. At a time of huge financial pressure on families on low incomes, it is very hard to justify this redistribution. For example, a family where one parent doesn’t earn enough to pay income tax won’t get any help at all which is unjust for people on low incomes. Work is work and people should be supported based on their income and need for childcare.
'We are glad this new offer equates to £1,200 per child, so it’s an improvement for those with more than one child, and that this widens support to families where their employer does not offer childcare vouchers.
'However there are a number of arbitrary features to the scheme which we think will be problematic. We are also concerned that this scheme is administratively complex, creating new costs that will have to be met either by the Government or by parents, and the arrangements will struggle to accommodate people with fluctuating incomes.
'We are concerned that parents of school-age children won’t benefit because this new support will initially only be for parents with children under five. Out of school childcare is expensive and often just as much a barrier to work for families on modest incomes.
'We urge ministers to consider using this additional funding more effectively to help the families that face the greatest barriers to work.'
Liz Bayram, Joint chief executive of the Professional Association for Childcare and Early Years (PACEY), said, 'Any new funding to help working families with the cost of childcare must be welcomed. These proposals increase the help available to families with more than one child and reach families who currently do not benefit from employer supported childcare vouchers.
'That said, there are a number of concerns that PACEY will be raising through this consultation, in the hope that Government will reflect again on some of the limits it has currently set for the scheme. PACEY would like to see access to the scheme for parents of school-age children brought in earlier and changes made to the current parametres, so that families on lower incomes can benefit. As well as helping with childcare costs for more families, these changes would mean more children would be cared for in safe registered childcare.'
Neera Sharma, Barnardo’s assistant director of strategy, said, 'The Government must ensure that extra funding goes towards helping the poorest families, who often face paying more in childcare bills than the money they earn.
'Barnardo’s is concerned that by allocating extra funding as income tax breaks, the Government is channelling the lion’s share of support to higher earners whilst excluding the lowest paid part-time workers altogether. This would make it difficult for many of the poorest families to work their way off the breadline, consigning children to poverty.
'The Government must act now to help struggling families work themselves out of poverty, by making childcare affordable for parents on the lowest incomes. They can start by ensuring that all families on Universal Credit have 85 per cent of their childcare subsidised.'
Paul Bartlett, from the Childcare Voucher Providers Association, who has welcomed the Government’s consultation on the tax-free childcare scheme, said, ‘The Government’s plans to build on the current scheme and extend it to the self-employed are most welcome. This group, who make up such an important part of the economy, will finally have access to the same level of support as everyone else.
‘The role of the employer in the current childcare voucher scheme has been a fundamental reason for its success. Ensuring there is a link between the new scheme and employers will help build on this success, and guarantee employers can still play an important role in helping their staff with their childcare costs.’