There is still much confusion over the tax status of childcare vouchers, but the publicity of recent months has served to boost demand for the benefit, says Jennifer Paterson
Childcare vouchers were the subject of much attention towards the end of 2009 after former prime minister Gordon Brown announced plans to phase out the tax relief on vouchers from April 2011.
The vouchers, which can be redeemed on government-approved childcare, produce tax and national insurance savings for employees on up to £55 a week or £243 a month of childcare costs. A 92,000-signature petition launched by the ‘Save childcare vouchers’ campaign opposed the changes. This, along with public pressure and strong opposition within parliament, led to the policy being modified.
Instead of withdrawing the tax relief to all new entrants from April 2011, as initially proposed, the Labour government decided to cap it at the basic 20% rate of tax only. This means that all current users of the scheme, including higher-rate taxpayers, will continue to benefit from the tax break, saving about £900.
Marc Woolfson, director at Westminster Advisers, says: “Prior to the [Labour] government announcement, there was already a need for clearer standards for childcare vouchers. The government had misunderstood how many people were using them and the support they provided to hard-working families.”
Further plans in April Budget
Further plans to alter the legislation around childcare vouchers were included in April’s Budget, aiming to relax retrospectively the “generally available” conditions applicable to tax exemptions on childcare vouchers and employer-supported childcare. The proposed amendment, which will be backdated to 2005/06, means the exclusion of any employees on the national minimum wage will not stop vouchers being available.
Childcare vouchers are usually offered through a salary sacrifice arrangement, whereby payments are taken from the employee’s gross salary. Employers can save up to 12.8% on NI contributions, while employees can save as much as £1,487 a year through reduced tax and NI payments. The vouchers can only be used with registered or approved carers, including childminders, nurseries and after-school clubs. Many providers offer vouchers electronically.
Alison Chalmers, director at KiddiVouchers, says: “The salary sacrifice agreements often last for a fixed initial period, typically ranging from three months to a year. Some employers allow a completely flexible arrangement, where employees can change their voucher order before each payday. Many schemes allow parents to accrue vouchers over the year, enabling them to spread the cost of expensive periods such as the school summer holidays.”
Last year’s plans to remove the tax exemptions and the subsequent U-turn have created uncertainty. Laura Czapiewski, childcare voucher product executive at Accor Services, says it could still pose challenges for employers. “This re-emphasises the importance of ensuring providers are in a position to give guidance on the most efficient and compliant practices for employers and offer clear communication to ensure all parties are aware of the implications.”
Steady growth in the market
Despite these challenges and a slowdown in take-up last year, providers are now reporting steady growth in the market. Simon Moore, managing director at Computershare Voucher Services (CVS), says: “The publicity and public support at the end of last year that led to the government revisiting plans to end tax relief on childcare vouchers made a lot of working parents wonder what they were missing out on.”
Iain McMath, managing director at Sodexo Motivation Solutions, adds: “The level of knowledge around childcare vouchers has risen dramatically because of all the furore around the potential withdrawal of them. Employers can show they care about employees and that they are trying to create a flexible environment for them that supports families.”
Some providers have also expanded their product range. Tracy Wilson, operations manager at Imagine Co-operative Childcare, says: “Most large employers have schemes in place, but as contracts come up for renewal, they are taking the chance to research alternatives.”
One-stop shop for benefits
These alternatives include widening what is offered alongside childcare voucher schemes, with some providers aiming to create a one-stop shop for benefits. Some providers offer additional perks such as retail vouchers, discounts on family days and childcare helplines. Others offer access to a database of carers to contact in an emergency.
With a growing number of childcare voucher providers in the market, some consolidation may happen. Paul Bartlett, head of employee benefits at the Grass Roots Group, says: “Employers are looking for quality providers that minimise the administration and assist both the employee and their carers to [supply] an efficient scheme.”
The rising number of providers and schemes is also making it harder to differentiate between brands of childcare voucher, says David Casson, sales manager at Kidsunlimited. As a result, employers are often buying them on cost alone.
The Childcare Voucher Providers Association (CVPA) is being established to create a voluntary code of conduct for childcare vouchers. Woolfson says no implementation date has been set. “The CVPA will provide information on how voucher funds are protected and details for childcare providers and parents,” he says.
Focus on facts
What are childcare vouchers?
Childcare vouchers are a means of paying towards government-approved childcare out of employees’ gross salary, saving on tax and national insurance (NI) for employees and NI for employers. Vouchers can be redeemed for a variety of childcare, until the child turns 16, as long as it is government registered. Both parents can take part, with each parent saving up to £1,487 (if they were a 50% income tax payer) a year depending on individual circumstances.
What are the origins of childcare vouchers?
These vouchers first appeared in the late 1980s when NI exemptions were introduced.
Where can employers get more information and advice about vouchers?
Nuts and bolts
What are the costs involved?
Most providers charge on the basis of a percentage of the value of vouchers ordered per pay cycle. The service charge is offset against the financial savings. Some providers run schemes with fixed charges no matter how many staff take up the benefit.
What are the legal implications?
All childcare providers and facilities must be government-approved and HMRC must be notified of schemes. If they are offered through salary sacrifice, employees’ contracts must be amended.
What are the tax issues?
Vouchers are exempt from income tax and NI if qualifying criteria are met. Staff can sacrifice up to £55 a week or £243 a month from their pre-tax salary. Vouchers are dealt with under PAYE.
What is the annual spend on vouchers?
Laing and Buisson figures show the value of employer-funded childcare for day nurseries in 2008 was about £995m. Of this, about £640m-£700m was for employer-funded vouchers.
Which providers have the biggest market share?
There is general industry consensus that the leading childcare voucher providers include Computershare (formerly Busy Bees) Voucher Services, Accor Services, Grass Roots Group and Sodexo. These are followed closely by Imagine Co-operative Childcare, KiddiVouchers, Bright Horizons, My Family Care and P&MM.
Which providers have increased their share over the past year?
These figures are not known. However, according to KiddiVouchers, they have been awarded more public sector contracts than any other voucher providers combined since April 2008.