Childcare vouchers are a popular benefit because they give working parents the flexibility of choosing their own childcare provider, while offering tax and national insurance (NI) breaks on the cost.
Childcare vouchers were first introduced in the 1980s and originally only carried an NI exemption. The current tax exemption was introduced in 2005, then in 2011 the scheme went through a further change when the amount of vouchers that higher-rate tax payers could claim was capped to offer the same tax exemption.
Working parents are able to buy, usually through a salary sacrifice arrangement offered by their employer, up to £243 worth of vouchers each month tax and NI free. Salary sacrifice enables the employee to pay for the vouchers out of their gross salary.
The vouchers can be used to pay an Ofsted-registered childcarer, or the equivalent in Scotland and Wales. Higher-rate tax payers are entitled to £124 a month, and additional-rate taxpayers are entitled to £110 a month.
The scheme is attractive to organisations as well as being beneficial to working parents, because the vouchers are free from employers’ NI contributions, up to 13.8%.
A scheme must meet certain criteria to gain the tax and NI exemptions: it must be offered to all employees within an organisation, except for those whose salary would fall below minimum wage as a result of salary sacrifice; the vouchers must only be used to pay for registered childcare for children up to age 15; and, since 2011, an employer must carry out a basic earnings assessment for each employee who joins the scheme.
Changes to tax-free childcare
The market is currently facing its next major change: from 2017, a new tax-free childcare scheme will be introduced, replacing the voucher scheme for all new entrants. Employees that are currently in a voucher scheme can stay in it for as long as their employer continues to offer it, or for as long as they stay at that organisation, but after the new scheme takes effect no working parents can join a voucher scheme.
When the new scheme was first announced in the 2013 Budget, chancellor George Osborne initially 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. It was originally due to come into effect in autumn 2015, but has been delayed until 2017 following a ruling by the Supreme Court.
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 (HMRC) 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 2017, employers will no longer be responsible for providing staff with childcare vouchers, but the tax exemption for workplace nurseries will remain.
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 17.
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, while 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, 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.
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.
Since the changes were announced, providers have been urging employers to communicate the changes to staff to ensure that they are fully aware of the choices available to them, and if they are not in a voucher scheme before the changes take effect, that they are made aware they will not be able to join past a certain date.
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, play groups, 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?
From the Childcare Voucher Providers Association at www.cvpa.org and the Daycare Trust at www.daycaretrust.org.uk. Information about the government’s new scheme can be found on the government website at www.gov.uk/government/news/tax-free-childcare-10-things-parents-should-know
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.
Who are the main providers?
More 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.
78% of employers offer childcare vouchers through a voluntary benefits scheme. (Source: Employee Benefits, The benefits research, published May 2014)
25% of employers offer childcare vouchers through a flexible benefits scheme. (Source: Employee Benefits, The benefits research, published May 2014)
82% of employers will continue to provide childcare vouchers after the introduction of the new tax-free childcare scheme. (Source: Jelf Employee Benefits, published August 2014)
39% of female employees who have failed to find information about their employer’s maternity benefits. (Source: Glassdoor, published November 2014)
£8000 – The amount working parents need to spend on childcare per year to get £2,000 from the government through the new scheme.