Vouchers have helped about 700,000 families to afford high-quality childcare since 2005, providing savings worth around £1,800 a year for the average family. This goes towards the average childcare cost of £5,028 a year for 25 hours’ care a week, according to figures from the Childcare Voucher Providers Association (CVPA).
Most employers that offer childcare vouchers do so via a salary sacrifice arrangement, in which employees give up some of their gross salary in return for childcare vouchers provided by their employer. This brings significant tax and national insurance (NI) savings for both employees and employers.
The amount that an employee can receive in vouchers before tax or NI contributions become payable will depend on their pay level and when they joined the scheme.
Before 5 April 2011, employees could receive up to £55 worth of vouchers each week, or £243 a month, without having to pay NI or tax on that amount. Those joining a scheme on or after April 6 2011 are still entitled to vouchers worth £55 a week free of tax and NI as long as their earnings do not exceed the higher tax rate threshold, which would reduce the amount of vouchers they can receive free of tax and NI.
Following the 2014 Budget, the upper threshold of the basic-rate tax allowance for childcare vouchers was increased from £41,450 to £41,865, which means parents whose earnings now fall into the basic-rate bracket could see their childcare voucher entitlement rise from £28 to £55 a week.
Tax-free childcare scheme
However, the market is to undergo significant change. Last year, the government announced it will introduce a new tax-free childcare scheme for working families that will ultimately replace the childcare voucher system.
When the scheme was first announced in the 2013 Budget, Chancellor George Osborne said it would be worth up to £1,200 per child per year. However, following a public consultation, the government increased the limit to £2,000 per child per year.
Starting in autumn 2015, the scheme will be available for up to £10,000 of childcare costs per child per year, with no limit on the number of children for whom a parent can claim. So a parent claiming the full £10,000 will pay £8,000, with the government paying a subsidy of £2,000.
New online tax-free childcare accounts will be run by HM Revenue and Customs in partnership with National Savings and Investments (NS&I). Vouchers will be available to be bought online, and can only be used to pay for Ofsted-regulated childcare.
From 2015, employers will no longer be responsible for providing staff with childcare vouchers, but the tax exemption for workplace nurseries will remain. Existing scheme members will be able to continue using their employer’s voucher scheme as long as they remain with the same employer, until their child reaches the age of 15.
The new tax-free childcare scheme is designed to support childcare for under-12s, with eligibility ending in the first week of September following the child’s 11th birthday, unless the child is disabled, in which case they will qualify up to the age of 16. This age limit will be phased in over the first year. When the scheme is launched, only under-fives will qualify, but by the end of the year it will apply to all under-12s.
The scheme will also be available to parents on paid sick leave, on paid or unpaid statutory maternity leave, and on paternity or adoption leave.
The scheme is designed to be flexible for parents if, for example, they want to go back to work after the birth of a child or to work part-time. They will be able to build up a balance and withdraw money from their childcare accounts. Multiple people or parties will be able to pay into childcare accounts, giving all parents, or their employers, the opportunity to contribute.
Impact of tax-free childcare
When the new scheme was first announced, with a £6,000 cap on costs, working couples with one child would have been worse off. But by raising the cap to £10,000, the government has ensured some parents can claim more.
According to government figures, a working couple with one child will be £134 a year better off if they spend the maximum £10,000, and a working couple with three children will be £5,375 better off. A single parent with two children will be able to claim £3,067 more a year.
However, a working couple with one child paying about £5,000 a year for childcare will be worse off under the new regime because they can only claim 20% of their costs, or £1,000 a year. Those with two children, spending £5,000 on each, will be better off.
One of the more controversial aspects of the scheme is that higher-rate taxpayers, including parents earning up to £150,000, when the 50% tax rate takes effect, will qualify for the same amount of government help as lower earners. This means government-subsidised childcare will be available for couples with a joint income of up to £299,999.98.
Employers’ workplace nurseries will not be affected by the introduction of tax-free childcare.
The new arrangement will not provide any NI savings, currently worth up to 12% for basic-rate taxpayers and up to 13.8% for employers. This will amount to a significant loss for some employers, which could affect the amount they spend on other employee benefits. Local authorities and NHS trusts are among the employers that could be worst hit.
What are childcare vouchers?
This is a government-backed scheme to help working parents afford quality childcare. Depending on their income, parents can receive childcare vouchers worth up to £243 a month from their employer, free of tax and national insurance (NI) contributions. Vouchers can be used for a range of regulated providers, such as nurseries, playgroups, nanny services, childminders and au pairs, and are valid up to the September following a child’s 15th birthday or, if the child is disabled, their 16th birthday. From autumn 2015, childcare vouchers will be replaced by the government’s new tax-free childcare scheme.
What are the origins of childcare vouchers?
Childcare vouchers were first provided in the late 1980s by some of the UK’s largest employers to help employees meet childcare costs. The tax exemption in its current guise began in April 2005.
Where can employers get more information?
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 arrangements, employees’ contracts must be amended. Employers must continue to provide vouchers to employees on maternity or adoption leave.
What costs are involved?
Costs to set up a scheme will vary depending on the size of the employer and the provider, which will normally charge a fee to administer a scheme. Some providers have fixed charges regardless of staff take-up rates.
What are the tax issues?
Vouchers provided in accordance with HMRC guidelines are free of tax and NI up to the permitted limit of £243 a month for basic-rate taxpayers. Employers must carry out an earnings-based assessment to make sure the employee falls within that banding. Low-paid workers and those receiving working tax credits may not be eligible for childcare vouchers.
What is the annual spend on childcare vouchers?
Figures are collated by HMRC on a voluntary and unverified basis, so exact statistics are not available. However, employer-funded vouchers have been estimated at £1 billion a year.
Who are the main providers?
Morte than 40 organisations provide childcare vouchers, including Allsave, Busy Bees Benefits, Computershare Voucher Services, Edenred, Faircare, Fideliti, Grass Roots, Kiddivouchers, Kids Unlimited, My Family Care, P&MM and Sodexo Motivation Solutions.
Three-quarters of employers would consider retaining their existing childcare voucher scheme after 2015 (Jelf Employee Benefits, December 2013).
Over the last five years, childcare costs have risen 27%, with parents paying £1,214 more in 2014 than they did in 2009 (Childcare Costs Survey, Family and Childcare Trust, 2014)
65% of employers want to be involved in the delivery of tax-free childcare, even if the current NI saving is removed (Making Childcare Work report, Childcare Voucher Providers Association, 2013)
About a quarter of parents think having more affordable, flexible or accessible childcare would make the biggest improvement to family life (Making Britain Great for Children and Families report, 4Children, 2013)
Childcare costs and cuts to benefits have led to more people being in pay-neutral work, where childcare and travel costs wipe out their earnings (Family Finances report, Aviva, December 2013)