New regulations announced by the UK Chancellor Gordon Brown will mean that from April 2005 employers will be able to contribute up to £50 a week towards the cost of childcare for their employees, free of tax and National Insurance contributions.
In his pre-budget report, the Chancellor also announced an increase of £180 per year in the child element of Child Tax Credit, to £1625 per child per year, equivalent to a weekly increase of £3.50.
The new rules are an extension of the current workplace nurseries tax exemption but mean that employers will be taking on the full cost of funding assistance to employees with children.
Employers will be able to make their own arrangements with nurseries, childminders and after-school clubs or provide staff with childcare vouchers to the value of £50 a week.
To qualify for the exemption employers will have to ensure that where childcare schemes operate they are "generally accessible to all staff".
But the tax-free sum is far from enough to cover the costs of a nursery place in the UK. The average cost of a nursery place for a child under two is £128 a week (more than £6,650 a year) across the UK, rising to as high as £168 (£8,730 a year) in London and the South East.
The tax exemptions also apply only to spending on officially registered or approved home-childcare. They will not apply to the seven out of ten employed women with dependent children who currently use informal childcare by friends, neighbours or family for all or part of their childcare.
But the Chancellor said that the definition of childcare would also be widened to include approved child care provided in the child's own home and that the definition of an approved child carer would also be broadened.
A Treasury spokesman said: "At the moment childminders can get extra qualifications to look after kids in the parents' homes, and the Government is looking to widen the number of people eligible for this under the home child carers' scheme. At present nannies are not included and it is unlikely they will be."
As a result, he said that he expected the number of childcare places to double from 750,000 in 1997 to 1.5 million by 2006.
The Daycare Trust welcomed the move, saying that it could benefit millions of employees using registered childcare. But it added that "the new scheme needs to be simple for employers to implement so all employees can benefit, particularly those working in small and medium sized companies."
But others were sceptical about what they saw as a token political gesture.
"This is definitely a Budget sweetener for employees with children and frankly a pretty small gesture - albeit in the right direction," said PriceWaterhouseCoopers’ John Whiting.
"However, it is not compulsory so it remains to be seen how many employers will actually offer these benefits to staff."