Focus on facts
What are childcare vouchers?
These are a government-backed scheme to help working parents afford quality childcare. Depending on their income, parents can take up to £243 a month in childcare vouchers from their employer, free of tax and national insurance (NI) contributions. Vouchers can be used for a wide range of regulated providers, such as nurseries, playgroups, nanny services, childminders and au pairs. The vouchers are valid up to the September following a child’s 15th birthday or, if the child is disabled, their 16th birthday.
What are their origins?
Childcare vouchers have been around since 1989, but the tax exemption in its current guise was introduced in April 2005. About 400,000 employees use childcare vouchers.
Where can employers get more information?
Information on all registered providers is available from the Childcare Voucher Providers Association. The Daycare Trust also provides information for employers about childcare vouchers.
Nuts and bolts
What costs are involved?
A provider will charge a fee to administer a scheme. This is usually a proportion of the total value of vouchers issued. The service charge is offset against financial savings. Some providers have 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 schemes. If vouchers are offered through salary sacrifice, employees’ contracts must be amended. If employers use a voucher provider, it will typically ensure the scheme is compliant. Employers are obliged to continue providing vouchers to employees on maternity or adoption leave.
What are the tax issues?
Vouchers provided in accordance with HMRC 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. Employers often declare any taxable vouchers on payslips rather than waiting until the year-end and then using a P11D.
What is the annual spend on vouchers?
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 providers have most market share?
Computershare Voucher Services, Edenred, Grass Roots and Sodexo Motivation Solutions are generally seen as the main players. Others include Busy Bees Benefits, Co-operative Employee Benefits, Faircare, Fideliti, Kids Unlimited, P&MM (including Allsave and My Family Care vouchers) and Wider Plan.
Which providers have increased their share?
Busy Bees has reported a 300% rise in parents joining its scheme in the past year, and Sodexo is seeing business growth of about 8% a year.
The tax treatment of childcare vouchers is changing, but employers and employees both still regard them as a valuable and desirable benefit, says Nicola Sullivan
T he tough economic climate and forthcoming changes to state-provided child benefit have thrust workplace childcare benefits into the employee spotlight.
From 7 January 2013, state child benefit payments will be gradually reduced for families where one parent’s income exceeds £50,000 a year. This comes at a time when the amount parents can take in tax-exempt childcare vouchers at work is failing to keep pace with inflation and the cost of private sector childcare. Childcare voucher providers are concerned this will leave middle-income families with a shortfall in childcare provision.
Fiona Shields, chair of the Childcare Voucher Providers Association (CVPA), says: “It is important to keep the amount [that can be taken in childcare vouchers] relevant. The cost of childcare is going up.”
Philip Curtis, managing director at Fair Care, says the value of childcare vouchers that can be bought out of tax-free pay has not changed since 2006. “It has fallen behind significantly in terms of inflation,” he adds.
Basic-rate taxpayer parents are still entitled to £243 a month (£55 a week) in tax-exempt childcare vouchers, which they can buy out of their gross pay via a salary sacrifice arrangement. The amount of tax-exempt vouchers that could be bought by high earners was last year reduced from £55 to £28 a week and for top-rate taxpayers it was cut to £22.
Childcare voucher provider Busy Bees Benefits is lobbying the government for the current allowance of £55 a week to be increased to £75. In its campaign Mind the Gap, the provider hopes to gather 100,000 signatures on an e-petition to make the issue eligible for debate in the House of Commons.
John Woodward, managing director of Busy Bees, says: “Raising the cap will increase savings for a basic-rate taxpayer by more than £300 a year, making the total savings more than £1,200 per parent, per year.”
Despite relatively low levels of provision, childcare vouchers remain a popular benefit because of their flexibility. They are not, for example, restricted to funding nursery care. Iain McMath, managing director of Sodexo Motivation Solutions, says cost-conscious working parents are increasingly using childcare vouchers to pay for after-school clubs. “We are aware how tight people’s budgets are,” he says. “We are seeing people use childcare vouchers in a much more flexible way.”
This trend has also been noticed by Fair Care’s Curtis, who says: “We have been seeing an increase in membership from people who are not using the vouchers for pre-school care but are using them more for after-school clubs and holiday clubs.”
Take-up rates for vouchers are fairly consistent because they are one of the most commonly offered workplace benefits. “Most employers do now offer childcare vouchers,” says Curtis. “There are very few exceptions.”
However, providers are working hard to differentiate their voucher offering. Edenred, for example, now provides information on childcare and useful helplines, as well as discounted store vouchers and reloadable cards, says Laura Czapiewski, the firm’s childcare voucher product manager.
Manage the consequences
Some providers, including Edenred, are also keen to promote how they help employers manage the consequences of legislative changes, such as the reduction in tax-free vouchers that can be bought by high-earning parents. This change requires employers to complete a basic earnings assessment of an employee who joins its voucher scheme after the start of the tax year and, pro rata, the monthly salary of an employer who joins the scheme mid-way through the year to determine which tax band they fall will into.
Czapiewski says: “It was this year the main impact [of the changes] was felt. Once somebody had joined the scheme after last April, a basic earnings assessment had to be done.”
She says assessments should review a number of factors, including basic pay as stated in the employee’s contract of employment, guaranteed bonuses, commission, London weighting or regional allowances, overtime payments and taxable employee benefits.
Employers keen to ensure their childcare voucher provider is compliant should contact the CVPA. The association’s code of practice stipulates that: service standards from providers are transparent; payments are made to carers within one working day of receipt of the voucher; data is held securely and managed in accordance with the Data Protection Act; and all voucher funds are kept separate from the provider’s own capital.
The CVPA’s Shields says: “We can assure employers if a [provider] is one of our members, its accounts are fine and the voucher funds are ring-fenced into another account and cannot be used for anything else other than childcare.”
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