Fuelled by expemptions within the 2004 Budget and a furhter lifting of the cap up to £55 a week, Jamin Robertson asks if childcare vouchers are having growing pains.

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Two years ago the childcare voucher market was buzzing as organisations clamoured to take advantage of new tax efficiencies that had just been introduced around these schemes.

Although many employers have since put new voucher schemes in place, employee take-up rates are not necessarily as high as you might expect.

The tax exemptions, when announced in the 2004 Budget, initially allowed employees to make tax and national insurance (NI) savings on childcare vouchers up to the value of £50 per week. The deal was sweetened in April 2006 when the cap was lifted to £55 per week.

Prior to the 2004 Budget, staff in the lower-tier tax band could save 11% NI on vouchers, regardless of their total spend. And there was little incentive for higher-rate tax payers to buy vouchers because they could only make 1% NI savings.

The 2004 Budget changed this by allowing additional tax savings of 22% for lower-tier taxpayers and 40% for those employees in the higher-rate tax band.

Vouchers bought by employees can be used to pay for nursery care or the services of a registered childminder. They can also be used for after-school clubs for children up to the age of 15 years.

Under a salary sacrifice scheme the employer deducts the money for the vouchers direct from the employees' gross salary. This means that basic rate taxpayers can save an amount of up to £962 per year (11% NI and 22% tax), while higher-rate taxpayers stand to save up to £1,195 a year (1% NI and 40% tax).

According to Accor Services Benefits research 2006, 42% of organisations offer access to childcare vouchers. However, take-up rates are not high. Employee Benefits/Towers PerrinFlexible Benefits Research 2006, for example, found that 72% of employers with flex or salary sacrifice schemes had take-up rates of between 1% and 10%, while 23% reported take up of between 11% and 20%.

Darren Smith, a reward consultant at Hewitt Associates, admits that the level of interest in childcare vouchers from employees has generally fallen short of expectations. "We were seeing about 2% to 3% [take up] before the tax and national insurance treatment changed [in 2004]. [Since then] we've seen [it] basically double, but it's still relatively small in terms of percentage."

But according to Andy Lister, head of employee benefits at Grass Roots, that may be as good as it gets. "You're not going to get 15% take up," he says.

Lister adds that while a significant number of staff in any organisation might have children, the number who actually pay for childcare is typically much lower. Tax rules state that childcare paid for through the voucher schemes must be registered, therefore reducing the number of staff who might opt in as many carers, such as grandparents, are excluded.

Furthermore, many employees at the lower end of the pay scale cannot be included in salary sacrifice childcare voucher arrangements as their pay would be dragged below the National Minimum Wage. Such schemes can also adversely affect Working Tax Credits.

Catherine Maddox, sales director for the provider Allsave, says this inhibits take up."This benefit should not be put in the same box as [benefits like] bikes for work. It's a cost that working parents have to bear. Potentially, salary sacrifice just makes it complicated for employees."

Grass Root's Lister agrees. "There are whole groups of people that are excluded because of the interaction with tax credits and the restrictions around [the] National Minimum Wage," he adds.

However, where staff can take advantage of a scheme adequate communication is the key to driving take up, and providers are critical of employers that fail to take this on board.

"I might have worked for [a company] three years ago when the scheme was launched and had no children so was blind to the initiative. Three years on, I've now got children, and unless I am reminded at that particular point I wouldn't know it was being [offered]," comments Lister.

Smith believes plenty of employers make this mistake. "When employers introduce a standalone childcare voucher scheme it's often driven from the finance division where they see the benefit of the employer realising the NI savings. Because it's driven from a finance perspective it doesn't get the communication and, therefore, the attention that it deserves. It's all good news but if it is not delivered in an employee-friendly way it just won't have any impact."

According to the consultants, employers that operate a flexible benefits scheme tend to be rewarded with better take up of childcare vouchers because these are promoted well alongside other benefits during the flex enrolment period.

But regardless of how well a scheme is communicated, the true value and degree of appreciation attached to the vouchers may vary according to where employees live. This is because the NI and tax-exempt spend on childcare goes further in some parts of the country than others.

According to childcare charity, The Daycare Trust, the tax and NI exemption on up to £55 per week represents 39% of the average weekly spend of £142 on childcare in England. In London and the South East the proportion is even lower, as average childcare costs in these regions are £197 a week, nearly four times the tax-exempt cap of £55.

"It's the North-South divide. In the South, [childcare is] significantly more expensive and there is greater demand for places as well," says Maddox.

While employees can't get tax and NI relief beyond the cap, Hewitt's Smith points out that childcare voucher schemes can be structured within a flexible benefits package to cover the full cost of employees' childcare. By doing this staff have the convenience of paying for their childcare costs in one transaction.

Aside from the regional variances, there are other notable issues surrounding childcare voucher schemes. Higher-rate taxpayers stand to gain the most from a scheme and since vouchers can be utilised by two working parents (if both their employers offer access), much greater savings are available to double income, high-bracket taxpayers with one child than to a single, working parent with three children.

"It's a blunt instrument. Normally a tax benefit is proportionate to the cost of the benefit. A better way would be by [giving] direct tax relief relative to what people spend," says Grass Roots' Lister.

Despite the obvious shortcomings, Jon Haynes, childcare manager for the consultants Premier Employer Solutions, claims there is no shortage of new business.

"This is one of the benefits a lot of organisations are looking to encourage. It won't ever pay for childcare completely, but it's better than nothing."

Case study: Cancer Research UK

Cancer Research UK tested childcare vouchers on a pilot group of 12 staff in April 2005 after the tax and national insurance exemption on vouchers up to £50 a week was introduced. The tax-exempt limit has since been raised to £55 and the charity now offers the benefit to all of its 3,300 staff.

Currently, 90 opt for the perk, which represents a take-up rate of 2.8%.

Amanda Carrick, former reward and recognition specialist at the charity, believes the scheme is highly valued. "Staff realise that it probably doesn't come close to covering the true cost of childcare, but I think every little helps," she says.

The organisation has held roadshows with its provider Accor Services to help raise staff awareness. It has also distributed brochures explaining the childcare voucher scheme among other benefits.

Carrick says this level of communication has helped raise awareness of the benefits of salary sacrifice. "I think there was some misunderstanding of how salary sacrifice works, but they are getting there," she says.

She also believes that the scheme added little administrative burden for the reward team. "Cancer Research has an electronic voucher system, operated through a website, which is really straightforward," she adds.

Case study: John Lewis Partnership

The John Lewis Partnership (JLP) has offered childcare vouchers since April 2005. It has recently added a feedback facility for the scheme to its intranet for John Lewis and Waitrose staff.

Gill Bowler, implementation manager of benefits projects at the partnership, says the feedback forum has revealed that employees are generally happy with the scheme they are offered. "Our [employees] are delighted, both with the service from our provider and the tax and national insurance savings. The comments received are really positive," she says.

Currently, 0.6% of partnership employees use the scheme, equating to around 384 of its 64,000 staff. Bowler says take up is restricted by rules stipulating that childcare must be registered because many employees enlist family members to help with childcare. In addition, rules governing the National Minimum Wage and Working Tax Credits mean some employees are unable to take part in salary sacrifice arrangements.

Research

  • 42% of organisations currently offer childcare vouchers (Accor Services Benefits Research 2006).
  • 81% of organisations offering a flexible benefits plan or salary sacrifice also offer vouchers (Employee Benefits/Towers Perrin Flexible Benefits Research 2006)
  • Of those that offer vouchers through a flexible benefits plan or salary sacrifice, 72% have a take-up rate between 0% and 10% and 23% have a take-up rate of between 11% and 20%. (Employee Benefits/Towers Perrin Flexible Benefits Research 2006).
  • 54% of organisations offer childcare vouchers as a voluntary benefit (Employee Benefits/Halifax Voluntary Benefits Research 2005).
  • 71% that provide voluntary benefits through salary sacrifice offer childcare vouchers (Employee Benefits/Halifax Voluntary Benefits Research 2005).