George Osborne confirmed the previously revealed changes to childcare assistance in the Budget.
Under a new scheme parents will be eligible to receive 20% of their yearly childcare costs, up to £6,000 a year.
It means that parents on joint incomes of up to £300,000 will be eligible for tax-free childcare support worth £1,200 a year. The scheme will save a typical working family with two children under 12 up to £2,400 a year.
It will be phased in from autumn 2015 and will ultimately be open to around 2.5 million families with children under 12.
From the first year of operation, all children under 5 will be eligible, initially opening the scheme to 1.3 million families, and the scheme will build up over time to include children under 12.
Deputy Prime Minister Nick Clegg said: “I want to help every family to get on in life. Already we have created a million private sector jobs, put money back in people’s pockets by cutting income tax, and extended free childcare entitlements for pre-school children.
“Delivering tax-free childcare is the next step to ensuring all families can work and get on. The rising cost of childcare is one of the biggest challenges parents face and it means many mums and dads simply can’t afford to work.
“This not only hurts them financially, but is bad for the economy too. This announcement of a £1bn investment in childcare will make sure it pays to work.
“An extra £1,200 for each child will make a real difference to families who find themselves constantly worrying about how to juggle their family budget. And extending support for working families on Universal Credit will make sure it is worth working extra hours even if you’re on low wages.”
But Alison Garnham, chief executive of Child Poverty Action Group, said the Budget abandoned Britain’s poorest families.
She said: “It’s a great disappointment for struggling families that the majority of extra funds for childcare will be going to the wealthiest families.
“The real challenge is to make childcare affordable for those at the bottom end, so that there are strong incentives for second earners and single parents. That would do much more to help reduce child poverty, and it would help economic recovery too.”
By Emma Lunn