More than two million families could eventually benefit from the tax-free plans set out ahead of the Budget.

Up to £1,200 would be paid for each child annually – to a maximum of 20% of total childcare costs. But, the scheme, which will replace the existing employer supported childcare programme (ESC) will not come into effect until late 2015, after the next general election. To qualify, both parents, or one parent in the case of lone parent families, will have to be in work and each must be earning less than £150,000 a year.

Initially the measures will cover children up to five years old, but the level of support will build up “over time” to include children under 12. Ministers say to start with, 1.3 million families will benefit, compared to 450,000 under ESC, eventually rising to around 2.5 million. The Government is set to invest £1.4bn in the plans – half-funded by abolishing the current childcare vouchers scheme and with the rest of the cash diverted from other departments.

Under the current scheme, parents get vouchers worth up to £55 a week, deducted from their salary before tax is paid. Prime Minister David Cameron and Deputy Prime Minister Nick Clegg announced in their January mid-term review that they would act to help working families with childcare costs. Ministers have already announced plans to let childminders look after more children, which they hope will reduce costs and make more nursery places available.

Britain has some of the most expensive childcare costs in the world – with fees rising at more than twice the rate of inflation, according to the Daycare Trust.

A report by the trust recently found that a place at the UK’s most expensive nursery cost £42,000 – some 25% more than a place at a top public school such as Charterhouse, which charges £30,574 a year.

For the full story, visit Sky News