Focus on facts
What are childcare vouchers?
These are a government-backed scheme to help working parents to afford quality childcare. Depending on their income, parents can take up to £243 a month of childcare vouchers from their employer, free of tax and national insurance contributions. Vouchers can be used for a wide range of Ofsted-approved care up to the September after a child’s 15th birthday (or, if the child is disabled, their 16th birthday).
What are the origins of childcare vouchers?
Childcare vouchers have been around since 1989 but the tax exemption in its current guise was introduced in 2005.
Where can employers get more information and advice about childcare vouchers?
Information is available from the Childcare Vouchers Providers Association.
Details of the tax implications can be found here.
The Daycare Trust provides some information for employers on childcare vouchers.
Read more articles on childcare vouchers.
Nuts and bolts
What are the costs involved?
A provider will charge a fee to administer a scheme on the employer’s behalf. This is usually a proportion of the total value of vouchers issued per pay cycle. The service charge is offset against 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 HM Revenue and Customs (HMRC) must be notified of the schemes. If vouchers are offered through a salary sacrifice arrangement, employees’ contracts must be amended. If employers use a voucher provider, it will typically ensure that the scheme is compliant.
What are the tax issues?
Vouchers provided in accordance with HMRC’s guidelines are free of tax and NI up to the allowed limits of £243 a month for basic-rate taxpayers, £124 a month for higher-rate and £97 a month for additional-rate taxpayers. Above these levels, tax and NI are payable.
NI must be accounted for in line with the employee’s actual earnings, so employers often declare any taxable vouchers on payslips rather than waiting until the year-end and then using P11D.
What is the annual spend on childcare vouchers?
There are no industry-wide statistics, but HMRC collates figures on a voluntary and unverified basis. The figure for employer-funded vouchers is believed to be about £1 billion a year.
Which childcare voucher providers have the biggest market share?
There are no official market figures, but it is generally recognised that Computershare Voucher Services, Edenred, Grass Roots and Sodexo Motivation Solutions are the main players and may have as much as 80% of the UK market between them. Other providers include Busy Bees Employee Benefits, Co-operative Employee Benefits, Kids Unlimited, Faircare, Fideliti, Wider Plan (formerly KiddiVouchers) and P&MM (including Allsave and My Family Care Vouchers).
Which providers increased their share the most over the past year?
The voucher market has struggled in line with broader economic performance in the last couple of years, but the period from pre-Christmas 2010 up to 5 April 2011 saw a flurry of activity, so much so that provider Computershare Voucher Services has seen a net increase of more than 16,000 new parents in the last three months alone.
Changing tax legislation is complicating employers’ provision of childcare vouchers for working parents, but the benefit remains popular with employees, says Roger Carter
Childcare vouchers are essentially a government-led initiative to help working parents pay for registered childcare. They are usually run via a salary sacrifice arrangement, with a proportion of the employee’s gross salary exchanged for childcare vouchers before income tax and national insurance contributions (NICs) are calculated. The employer also saves up to 12.8% in NICs per year on the amount its staff are taking in childcare vouchers.
Fiona Shields, chair of the Childcare Voucher Providers Association (CVPA), says: “The value of childcare vouchers an employee can take is restricted by HM Revenue and Customs (HMRC) and the rules changed on 6 April 2011. The new rules were designed to ensure all working parents broadly receive the same tax exemption, so if an employee is a basic-rate taxpayer, they can take up to £55 a week in childcare vouchers, if they are a higher-rate taxpayer they can take up to £28 a week, and if they are an additional-rate taxpayer they can take up to £22 a week.”
Staff who signed up to take childcare vouchers before 5 April can still receive the previous full tax exemption no matter what their tax status. But April’s change in legislation has brought new administrative burdens for employers in the form of annual basic earnings assessments. Julian Foster, managing director of Computershare Voucher Services, says: “Prior to the next 5 April cut-off, employers need to make a reasonable assessment of earnings for each new voucher user for that year. It is only based on guaranteed income, but could include bonuses, guaranteed overtime, things like London weighting, shift allowances, and even pay deals for certain on-call workers.”
Alison Chalmers, director of Wider Plan (which includes Kiddivouchers), adds: “The legislative change requires employers to conduct a basic earnings assessment once a year for all post-5 April 2011 joiners, but also for any existing members who take a break of more than 12 months from the scheme.”
Watch the new tax rules
If any pre-April 2011 voucher participants change employer ≠– but not voucher provider – they also immediately become subject to the post-April 2011 tax rules, says Laura Czapiewski, product manager in childcare vouchers at Edenred.
So the new regulations give employers plenty to cope with. Tracy Wilson, group operations manager at Co-operative Employee Benefits, says: “There are a lot of questions in the assessment if, for instance, someone is getting a [known] pay increase or having their hours cut. Also, if an employer is challenged by HMRC, it must be able to justify how the decision was reached.”
The provision of vouchers includes payments to carers being made on time and matters such as the segregation of voucher funds. Wilson adds: “As providers, we hold money to pay out, so protecting that money correctly is vital for parents and carers alike, but providers also hold a lot of information on salary, children’s details, national insurance numbers, salary and pay details. Much of this impacts on issues like data protection.”
It was such issues that led to the CVPA’s formation in March 2011, says the body’s Shields. “Its founding board members were from the larger providers and it represents employer-supported childcare providers and promotes best practice within the sector. The CVPA is also looking at service levels and how voucher providers achieve certain standards.”
The market is likely to see a number of developments, says Kelly Harris, product manager at Sodexo Motivation Solutions. “We will continue to see strong demand for voucher schemes from parents. This will come in the form of a burgeoning desire for online offerings and e-vouchers, but we will also see the consolidation of smaller providers.”
Some consolidation has already taken place, with P&MM acquiring Allsave and My Family Care Vouchers last month. Other providers, such as Wider Plan and Busy Bees Employee Benefits, have taken steps to broaden their product range to incorporate other benefits, such as employee discounts.
To get the best value, employers should check the price of the vouchers they offer. Wider Plan’s Chalmers says: “Most traditional voucher providers have significant price disparity between older clients and new clients, with some longer-term clients paying more than 10 times as much as new contract awards. We would expect this disparity to close over time.”
Iain McMath, managing director at Sodexo Motivation Solutions, concludes demographics may also influence vouchers’ popularity. “Two-thirds of people out of university are women,” he says. “The talent pool of tomorrow is predominantly female and employers have to have benefits that attract them.”
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