Working families will receive up to £1,200 per child a year under major plans to slash the cost of childcare.
More than two million families stand to benefit from the tax-free childcare plans, which have been announced ahead of Wednesday's Budget.
Eligible families will be given up to £1,200-a-year for each child, up to a maximum of 20% of their total childcare costs.
To qualify, both parents - or one parent if they are raising children alone - will have to be in work and each must earn less than £150,000.
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.
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 pledged in their January mid-term review that they would act to help working families with childcare costs.
The move appears designed to appease many parents furious at losing their child benefit after cuts to what was once a universal handout.
Mr Cameron said: "Too many families find paying for childcare tough and are 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."
Deputy Prime Minister, Nick Clegg added: "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."
Sally Russell, co-founder parenting site Netmums.com, said: "If implemented carefully, it should help a greater number of families with the crippling costs of childcare and keep parents in work."
But William Higham from Save The Children criticised the scheme for failing to prioritise low earners and for the delay in its introduction.
"A policy that doesn't benefit struggling families until 2016 will mean another three years of juggling costs amidst a deep recession. Some parents will be unable to work until that comes into force," he said.
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.
Shadow education secretary Stephen Twigg said: "Families need real help with the cost of childcare now, not promises of help in two and a half year's time."