Parents 'to be able reclaim up to £1,200 of childcare costs'
Some parents in the UK will be able to claim back up to £1,200 a year for each child - or 20% of childcare costs - from 2015, under government plans.
Parents will be allowed to claim back 20% out of a total of around £6,000 - what they believe to be the average annual price of a childcare place.
Initially, it will cover children up to five years old, but will build up "over time" to include all children under 12.
But Labour said parents would be disappointed not to get help sooner.
Britain has some of the highest childcare costs in the world, with many people with two or more children saying it does not make financial sense for both parents to work.
Prime Minister David Cameron said the plans, expected to cost £1.4bn, would be a "boost direct to the pockets of hard-working families".
The government says it expects the new tax-free childcare scheme to eventually help 2.5 million working families.
That is significantly more than the current employer-supported childcare voucher scheme, which is provided by only around five per cent of employers.
But it is not yet clear whether parents will be better off under the new scheme or the existing voucher schemes.
To be eligible for the new support both parents will have to work - or the one parent in the case of lone parent families - and each parent must be earning less than £150,000 a year.
In two-parent families where one parent does not work, families will not receive support - which is said to underline the government's support for making work pay.
Half of the funding for the new scheme will come from the abolition of the previous system of childcare vouchers, and in part by funding switched from elsewhere in Whitehall.
Sources across Whitehall told BBC Newsnight's political editor Allegra Stratton they were "jubilant" a deal had been struck, with one saying the four-month negotiations had been a "monumental battle".
Mr Cameron said too many families were finding paying for childcare "tough" and were "often stopped from working the hours they'd like".
"This is a boost direct to the pockets of hard-working families in what will be one of the biggest measures ever introduced to help parents with childcare costs," he added.
Deputy Prime Minister, Nick Clegg said he wanted to help "every family to get on in life".
He said: "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."
Under the current employer supported childcare voucher scheme, parents can receive vouchers for childcare worth up to £55 a week. This sum is deducted from their salary before tax is paid.
The saving in tax and national insurance is typically worth about £900 a year for a basic-rate taxpayer. Where both parents work, families can save about £1,800 a year.
These vouchers are available only to employees whose employer is part of the scheme, but the new policy is expected to be open to all working parents who meet the criteria.
Parents who already claim childcare vouchers through the old scheme will be able to continue to do so if they wish, but it will be closed to new claimants who will be moved to the new tax-free childcare scheme.
The new system will be phased in from autumn 2015, with children under five helped in the first year. The scheme will then build up over time to include all children under the age of 12.
Ministers say that to start with, 1.3m families will benefit - compared to 450,000 under the current scheme - eventually rising to around 2.5m.
The government has already announced changes to allow nurseries and childminders in England to look after more children, which it says will make more childcare places available and reduce costs for parents in the "long term".
Education and childcare minister Elizabeth Truss told the BBC that parents would be able to go online to set up an account and it would be easy to do.
Anand Shulka, chief executive of national childcare charity, the Daycare Trust, said the "almost universal" benefit had to be welcomed.
He said the scheme would be available to more families, and vouchers would be extended to self-employed people for the first time. But there would still be "losers from the scheme as well as winners", he added.
"If we were designing a system, we would want to see something that gave more support, earlier than 2015, to people on lower incomes," he said.
"The problem with a targeted system is it is difficult to administer and doesn't have the same buy-in as a scheme that offers support as widely as possible."
Labour's shadow education secretary Stephen Twigg said: "Parents will be disappointed that three years into this government they will not get any help with childcare costs for another two and a half years.
"While working parents won't get any help before the next election, David Cameron is happy to help millionaires with a tax cut now."
He said the measure would not make up for the cuts the government has already made to support for children.