As well as enabling working parents to afford childcare, this perk can also offer significant tax and national insurance (NI) savings for employees and employers.
Childcare vouchers have been around since the late 1980s, but the current tax exemption was introduced only in April 2005.
The amount an employee can receive in vouchers without having to pay tax or national insurance contributions (NICs) will depend on when they joined their employer’s scheme and on the level of pay they receive.
If an employee joined a scheme on or before 5 April 2011, they could receive up to £55 worth of vouchers each week, or £243 each month, free of tax and NICs.
If they joined a scheme on or after 6 April 2011, they are still allowed up to £55 a week free of tax and NICs if their employment earnings do not exceed the higher tax rate threshold. If their earnings are above the higher or additional tax rate thresholds, the amount of vouchers they can receive free of tax and NICs is reduced.
Allowance limits
The childcare voucher allowance for higher-rate taxpayers is £28 a week or £124 a month, and for additional-rate taxpayers, the limit is £22 a week or £97 a month.
From 6 April 2013, the exempted amount for additional-rate earners will be £25 a week or £110 a month.
For tax purposes, employees are only entitled to receive up to the relevant exempt amount shown above, regardless of the number of jobs they have.
Childcare can take up a huge proportion of an employee’s salary. The Childcare affordability report, published by Family Investments in December 2012, found that UK mothers were working up to four months of the year just to pay for care for their children.
The research also showed that the rising cost of childcare is causing some parents to consider staying at home instead of returning to work.
This means childcare vouchers are likely to remain highly valued as an employee benefit.
Tax-free childcare scheme
In his 2013 Budget in March, Chancellor George Osborne confirmed that the current childcare voucher system will be replaced by a tax-free childcare scheme for working families.
The change, which will take effect from autumn 2015, will see the government provide working families with 20% of their childcare costs, up to £1,200 initially for each child up to five years of age and eventually for children under 12 years of age by about 2020. This is equivalent to basic-rate tax relief on childcare costs up to £6,000 a year.
From 2015, employers will no longer be responsible for providing staff with childcare vouchers, but the tax exemption available for workplace nurseries will remain.
The government is consulting with providers until June 2013 on the detailed design and operation of the new scheme, including how employers can continue to play a role in helping their employees with childcare costs.
Burden on parents
The worry is that the tax benefits employers enjoy are being taken away without a suitable alternative and that the burden placed on parents could become too heavy. This is because, from 2015, parents take on the responsibility of using a voucher service.
It is estimated that more than 18 million employees have access to the current childcare voucher scheme. According to Employee Benefits’ exclusive research The Benefits research 2013, published in May 2013 which surveyed 561 HR and benefits professionals, the most common voluntary benefits offered through a salary sacrifice arrangement are childcare vouchers, according to 76% of respondents.
Childcare voucher providers argue that raising the cap on the maximum amount available per parent and extending vouchers to the self-employed will broaden access to this popular benefit.
At the time of going to press, parents, employers and industry providers are still awaiting information from HM Revenue and Customs (HMRC) about what the new childcare voucher scheme will look like.
Impact of new system
Childcare voucher providers have stressed that because employers have been at the heart of childcare vouchers since the scheme began, the impact of the new system on employers and staff needs to be fully understood before the government implements the changes.
One of the issues that has arisen during the consultation process relates to the fact that parents will have to contact voucher providers directly in the future. It has been argued that there must be a robust checking mechanism in place to make sure parents are eligible for the vouchers. The government and organisations taking part in the consultation are still fleshing out how this will work.
Industry providers have lobbied the government to increase the support working parents receive. They welcomed the government’s commitment to extend the scheme to all working parents.
Age bracket for eligibility
The fact that the new system will initially cover only children under five will be a challenge for many parents. Industry providers are consulting the government over when the age bracket for eligibility can be raised.
Since Employee Benefits’ last Buyer’s guide to childcare vouchers in 2012 (June 2012), some substantial legislative changes have affected working parents. For example, the right to unpaid parental leave for parents with children under the age of five has been extended from 13 to 18 weeks, with effect from 8 March 2013. This change was made under the revised Parental Leave (EU Directive) Regulations 2013, which were originally due to come into effect in March 2012.
This move is significant because more than half (58%) of respondents to research carried out by law firm Allen and Overy would consider taking extended paternity leave. The report, Discrimination at work: Paternity rights 2013 published in March 2013, which surveyed 1,163 working men, found that 79% of those aged between 25 and 34 would consider taking extended paternity leave, as would 70% of those aged between 35 and 44.
Unpaid parental leave
The extension of the right to unpaid parental leave followed the government’s introduction of the Children and Families Bill into Parliament on 4 February 2013.
The Bill proposes that, by 2015, working parents will be able to share parental leave after a child’s birth; prospective parents will be allowed to take more time off for antenatal appointments; leave and pay entitlements for adoptive parents will be aligned more closely with those for birth parents; and the right to request flexible working arrangements will be extended to all employees.
THE FACTS
What are childcare vouchers?
They 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 contributions. Vouchers can be used for a range of regulated providers, such as nurseries, playgroups, nanny services, childminders and au pairs. They 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 began in April 2005. The benefit originated from major employers wanting to help staff with childcare costs. About 400,000 employees use vouchers.
Where can employers get more information?
The Childcare Voucher Providers Association and the Daycare Trust.
What are the legal implications?
All childcare providers and facilities must be government-approved and HM Revenue and Customs 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?
There are no set costs. A provider will charge a fee to administer a scheme. This is usually a proportion of the total value of vouchers issued. Some providers have fixed charges no matter how many staff take up the benefit. However, because the market is competitive and employers vary in size, there is no consensus on prices.
What are the tax issues?
Vouchers provided in accordance with HMRC guidelines are free of tax and national insurance 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. Employers must carry out an earnings-based assessment to make sure the employee falls within that banding. Employees in receipt of working tax credits and/or the national minimum wage may not be eligible for childcare vouchers.
What is the annual spend on vouchers?
HMRC collates figures on a voluntary and unverified basis, so there is no rigorous data, but the figure for employer-funded vouchers is believed to be about £1 billion a year.
Who are the main providers?
There are more than 40 organisations in the childcare vouchers industry. Some of the biggest providers are: Allsave, Busy Bees Benefits, Computershare Voucher Services, Co-operative Employee Benefits, Edenred, Faircare, Fideliti, Grass Roots, Kids Unlimited, My Family Care, P&MM, Sodexo Motivation Solutions and Wider Plan.
STATISTICS
32% of employees said childcare vouchers had influenced their decision to return to work after having a family
Source: Busy Bees Benefits customer survey 2012, Busy Bees, January 2013
22% is the pay gap between men and women in families with one or more child
Source: Closing the gender gap: act now report, Organisation for Economic Co-operation and
98% of employers offered childcare vouchers in 2012 through salary sacrifice, up from 97% for 2011
Source: The Benefits Research 2013, Employee Benefits, May 2013 Development, December 2012
