Buyer’s guide to childcare vouchers

Recent tax breaks have seen a boom in business for voucher providers, with newly entitled higher income earners scrambling to make use of tax breaks, says Jamin Robertson

Article in full

Childcare voucher schemes have been the big mover of recent times, as recently introduced tax breaks have had employers queuing up to put voucher plans in place.

The industry has been building steadily but interest in vouchers has exploded since tax relief was announced in the 2004 Budget, which came into effect on April 5. This brought tax and national insurance (NI) exemptions to childcare vouchers capped at £50 per week.

The upshot is that business for providers is booming; and employers coming late to the party could experience something of a bottleneck. John Woodward, group managing director of voucher provider Busy Bees, points out: “The legislation has brought a huge change. The level of enquiries has increased tenfold, as there’s [now] a different market.” Derek Hayes, sales and business development manager at Family Matters, adds: “Before, [childcare voucher schemes] weren’t so attractive to the higher paid. Now [with the universal £50 cap] there’s a real flood of interest.”

And there is still plenty of growth potential in the market. David Burkimsher, client relations manager at voucher firm Leapfrog, explains: “Joe Public is calling saying ‘can you tell me what vouchers are all about’. There’s still a long way to go though, before people are [fully] aware what the potential is and the savings that can be made.”

These views are backed up by hard facts. In April, Accor Services Benefits Research 2005 revealed 29% of respondents currently offer childcare vouchers, an increase of 11% on last year. A further 18% plan to introduce vouchers this year, with a total take-up rate of 43% projected for early 2006.

With all this growth going on, some new voucher providers have entered the market, including Imagine Childcare Co-operative. Emma Gardner, the firm’s national sales manager, says: “[The new tax break] is a fantastic change. It opens up [vouchers] to a lot more working parents.”

This time last year, electronic vouchers were tipped to expand rapidly, almost disproportionately to the demand for vouchers generally. But the budget changed all this, as employers seemed happy to get their hands on childcare vouchers, regardless of the delivery format. The new tax rules offer savings to top-tier taxpayers willing to fund registered childcare through salary sacrifice. Employees earning more than £32,760 can benefit by up to £1,066 a year, compared to the £858 in tax and NI savings available to basic rate tax payers.

Prior to the changes, staff within the average tax band stood to gain full NI exemption regardless of their total spend. But there wasn’t much incentive for top rate taxpayers to get involved, with a minimal NI saving of 1%. Now they can add tax savings of 40%. This could account for a notable shift towards men taking up the benefit. Anne Ross, corporate business manager at Accor Services, has also noted burgeoning male participation in vouchers. “Men’s interest has skyrocketed, [they] can see the tangible financial benefits.”

There are, however, some further losers. Consider, for example, parents already shelling out a few hundred pounds a week on childcare. Previously, the entire bill attracted NI savings, but since April 5 only £50 will escape tax and NI.

Derek Hayes, sales and business development manager at voucher provider Family Matters’, says: “Parents will see no [incentive in spending] more than £217 [per month].” With which Leapfrog’s Burkimsher, concurs. “[We’re] going to see voucher value per employee generally reduce.”

Also employers running voucher schemes before April were able to recoup costs through NI savings, limited only by the amount workers wanted to spend. But like staff, employers now face the ramifications of the £50 cap. Andy Lister, head of employee benefits at provider firm Grass Roots, dismisses the suggestion employers might now pay more. “NI savings per employee will decrease, but the numbers of employees participating will increase, so it will be at least equal to where it was before, just not as much [money] per head,” he says.

To sum up: employers stand to recoup a yearly maximum of £333 per employee on their voucher spend, based on NI savings capped at £50 per week.

And there is another equity issue. ” A single parent with three children will get tax relief to £50 a week [whereas two] parents employed with one child can both claim £50 a week,” explains Lister.

Employers of those earning around the minimum wage still won’t see a big incentive. Salary sacrifice arrangements could drag wages under the statutory minimum. Lister says those on close to minimum pay are probably better off with Working Tax Credits.

In setting up a scheme, Hayes says that after a provider is selected, employers must decide how the scheme will be funded (most commonly through salary sacrifice) before they communicate it to staff. He recommends allowing one month to adequately circulate the benefit to workers.

Despite the lack of incentive for parents to go beyond a £50 weekly spend, providers generally think the future is rosy. Busy Bees’ Woodward says: “There’s far more clarity in salary sacrifice, and [with legislation changes] there’s government [backing] too.”

Many providers also attribute growth to an increased acceptance of salary sacrifice, both by employers and unions. “Salary sacrifice used to be a scary term. [Now there’s] lots of things done through [it]. Looking forward, it’s a really exciting time,” says Hayes.

Grass Roots’ Lister is cautious, pointing out that even strong voucher uptake rates will take time to impress across the board. “I [predict] take-up of around 1%-3% in the first year. What we’re seeing now is in that range. That’s somewhat lower than some industry people are suggesting. Large retailers [for example] will have significantly lower rates due to a range of diverse working patterns.”

The Facts

What are childcare vouchers?

A childcare voucher is a paper stamp or coupon, or online account, redeemable for a childcare service. They can be purchased through salary sacrifice under flexible benefit or voluntary benefits schemes. Less commonly, employers fund a scheme on top of the salary package. Through salary sacrifice arrangements, childcare vouchers allow staff to swap untaxed income for childcare, whereby an agreed amount is deducted from gross earnings and converted to vouchers.

What are the origins of the product?

Accor introduced the first childcare voucher scheme in 1989. Since then, there has been a gradual growth and providers say there has been a real acceleration in interest this year due to the tax and NI changes introduced in April 2005.

Where can employers get more advice and information?

The Daycare Trust publishes fact sheets for both employers and workers on the issues involved with childcare vouchers and salary sacrifice, and broader information about childcare (

Nitty Gritty

What costs are involved?

Despite the changes, providers say employers should find the scheme cost neutral or positive, through NI savings up to the weekly £50 cap. That equates to a maximum annual amount per employee of £333. Providers charge an administration fee between 5%-10% of voucher value.

What are the legal issues?

Implementing a voucher scheme through salary sacrifice requires staff to sign a salary sacrifice agreement so employment contracts will need to be altered. The new legislation requires childminders to be registered, and nurseries to be approved by the government childcare regulator, Ofsted.

What are the tax implications?

NI and tax exemption on vouchers is limited to £50 per week provided childcare comes from an registered carer. Basic rate taxpayers save 22% tax and 11% of NI, saving up to £858 per year, compared with an average of around £400 previously. Employees earning more than £32,760 a year save 40% of tax and 1% of NI, resulting in savings of up to £1,066.

In Practice

What is the annual spend on childcare vouchers?

Currently, the market is estimated to be worth £90m.

Which providers have the biggest market share?

Accor is considered the biggest provider claiming to have a 60% market share. Other major players include Busy Bees, Family Matters, Grass Roots and Sodexho Pass.

Which providers increased their share the most over the past year?

There has been a surge of new business, so all providers are recording massive growth. Among the big providers, Accor says it has increased its client base by 100% while Busy Bees has quadrupled staff numbers, with a 42% client increase since April.