Basic rate taxpayers will continue to be exempt from all tax and National Insurance Contributions on the value of their vouchers, but in future, higher-rate tax payers who currently receive tax relief at 40 per cent will have the benefit halved.
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.
Prime minister 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, saying it was badly targeted and that better-off families were the main beneficiaries.
But the Government 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 last week, Mr Brown 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 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.'
He also reiterated the Government's commitment to expand the number of childcare places for two-year-olds but said this would now take place at a slower rate.
Simon Moore, managing director of Computershare Voucher Services, said that the decision would benefit parents, businesses and childcare providers. '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,' he said.
'I would like to applaud the Prime Minister for listening and thank everyone who has supported us in our campaign.'
Reactions to the Decision
'This was a very unpopular proposal, as highlighted by the swell of protest from all quarters. Taking money from one group of parents' pockets to help another was regressive and potentially even more damaging for the economy. Now is not the time to take choices and rewards away from hard working parents.' - Neil Leitch, director of communications, the Pre-School Learning Alliance
'NDNA has highlighted the value of vouchers, including how they represent a guaranteed source of income for nurseries. Without them many families were reporting that they would need to look at their working hours. Parents across the country will be pleased the Government has recognised it is not just a benefit for higher-rate taxpayers. Vouchers are also vital in helping nurseries to survive financially during the recession. In 2008 vouchers brought £721m into the sector, much of which was paid directly to nurseries.' - Purnima Tanuku, chief executive of National Day Nurseries Association
'Childcare vouchers have proved a useful supplement for many families and universal support for families to pay for quality childcare, particularly during this economic downturn, is necessary to make childcare more affordable and more sustainable.' - Catherine Farrell, joint chief executive of the National Childminding Association
'This is great news and an immense relief. Like thousands of other parents, I was very concerned about how losing these vouchers would affect my childcare arrangements and ability to work. I'm so happy the Government has seen sense and listened to the concerns of hardworking parents everywhere.' - Hannah Andrews, a policewoman and mother.