'Tax-Free Childcare' is a confusing and inaccurately named scheme that launched in April 2017. It can be worth thousands of pounds, but only 250,000 of the 1.5 million eligible families are collecting it.

The fact so many have been put off isn’t surprising, as the scheme has been beset with problems, poor communication and tech glitches. Yet now I believe it's time to look afresh.

For those paying for childcare, it can be worth £2,000 annually per child, towards Ofsted (or equivalent) registered nurseries, childminders, nannies, after-school clubs, play schemes and home care.

Yet it’s not for everyone, so let me go through this with a brief step-by-step guide – for full details and calculators see my full ‘Tax Free Childcare help’ guide at www.mse.me/taxfreechildcare.

First, check if you even need to pay for childcare

Every parent in the UK can get funded childcare for all 3 to 4-year olds – so you don’t pay. How much you get depends on where you live.

  • England: 3 and 4-year-olds are entitled to 570 hours (roughly 15 hours a week) of free childcare per year.

Get an additional 15 hours a week if you earn an average of at least £131 a week (both parents in a couple must) and no one parent can have an annual salary over £100,000. Some families with a low income may also get free classes for 2-year-olds.

  • Scotland: 3 and 4-year-olds are entitled to 600 hours of childcare (16 hours a week). The Scottish Government plans to increase this by 2020 and some have already had extra hours phased in.
  • Wales: 3 and 4-year-olds get a minimum of 10 hours a week, though in some part of Wales you can get up to 30 hours a week.
  • Northern Ireland: 3 and 4-year-olds get up to 22.5 hours a week.

Though how smoothly this all works is open to question – many childcare providers argue they are underfunded to do the job.

Pay for childcare and have income under £40,000?

If you're working (in a couple both must work) and pay for childcare, then the new universal credit social security system could cover up to 85% of your childcare costs up to a maximum of £7,750 for one child, or £13,300 for more children.

Who’s entitled to this benefit is complex. I tried to come up with a rule of thumb – as I did for its predecessor tax credits - but it is impossible. So instead if you pay for childcare, work (both work in a couple) and earn under £40,000 I’d definitely spend ten minutes on the www.mse.me/benefitscalc. I’m not saying you will get universal credit, just that it is worth checking.

How much you can get –if you're entitled to it at all – depends on your individual circumstances. If you've expensive childcare costs, you may be due it even at higher income levels.

If you get universal credit, you won't be able to get Tax-Free Childcare (but you'll likely get more on universal credit anyway).

Tax-Free Childcare

Now we get onto what this is all about. To get ‘Tax-Free Childcare’ you open up an online, state run, www.childcarechoices.gov.uk account and for every 80p you put into it the state adds 20p.

You can put in up to £8,000 PER CHILD per year, so up to £2,000 (£4,000 if your child is disabled) will be added for use towards Ofsted (or equivalent) registered childcare.

The gain from this boost is equivalent to the income tax paid by a basic-rate taxpayer - hence the name. Though higher-rate taxpayers don't get a bigger boost – so the name is confusing, rather than helpful.

To be eligible for it you must…

  • Be paying for Ofsted (or equivalent) childcare for an under-12 (under-17 if he or she is disabled).
  • Be working and earning £131+/week - for couples, both must earn this. No one parent can earn £100,000+/yr.
  • The self-employed can also get this, as well as those who are employed.

Already get childcare vouchers? You may be best to stick with them

Tax-Free Childcare was designed to replace the old Childcare Vouchers scheme that closed to new sign-ups last October. Though if you were already getting them, you can keep them going, so may still be using them now.

And often they are worth keeping, especially for couples where only one parent works, as that disqualifies you from Tax-Free Childcare, but not from vouchers.

If you're eligible for both schemes, parents with more children and higher childcare costs, are better off with Tax-Free Childcare as there’s far more free cash available. Yet for those with lower childcare costs and fewer kids, vouchers can be better as while less is available, they’re effectively a bigger discount for each pound spent. I’ve done a full infographic so you can compare the two at www.mse.me/comparechildcare.

It is worth noting, while you can use Childcare Vouchers if you get universal credit, it tends to reduce the amount of universal credit you can get for childcare, so it’s often not worth using vouchers if you’re eligible for universal credit.

Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.