New tax rules for childcare vouchers

Staff must get childcarers registered as soon as possible or risk losing the tax break, says Jenny Keefe

Article in full

Simple maths suggests that, with the average yearly cost of a full-time nursery place being £7,000, some working parents can struggle to make the sums add up. Yet just one-in-ten employers currently provide some kind of help with the cost of childcare, according to research from charity the Daycare Trust.

This could all change in April, however, when the government introduces new tax and National Insurance breaks for employer-supported childcare. Which should be good news for business because with high employment and an ageing population, the economy needs all hands on deck. The government cannot afford women, or increasingly men, to quit their jobs because they cannot reconcile their responsibilities at home and at work.

Alexandra Jones, senior researcher at think-tank the Work Foundation, says employers need not look far to see the benefits of assisting with childcare costs. "We have a very different labour market now. Where help with childcare is provided, it really can help keep parents in the workplace and help them feel more motivated. It also makes them less worried, because worries about childcare can really prey on the mind. [Help with childcare] can help employees be more productive."

Under current rules, childcare vouchers are taxed as a benefit-in-kind. If you give vouchers, they are free of NICs, but staff are liable for tax on their value. However, from April 2005, the first £50 worth a week will be both tax and NI free, as will any related administration by the employer. Andy Lister, head of employee benefits at Grass Roots Group, predicts a basic rate taxpayer will save about £850 a year and a higher rate tax payer about £1,050 a year. Both parents can claim the saving. But the £50 ceiling is allocated per parent, not per child and stays the same whether an employee has one child or 10.

The reform aims to make the system easier to understand. Nancy Weeden, childcare services manager at voucher provider Sodexho Pass, says: "Childcare vouchers are one of the best kept secrets in the industry. The problem with current childcare vouchers is, quite simply, that they are only NIC exempt and most people don’t understand what that means, but as soon as you say tax free, that will be something that registers with far more employees and obviously the savings are going to be significantly greater.

"Also the current scheme is only attractive to people whose salaries fall between the upper and lower national insurance brackets [£4,745 and £31,720]. For employees who earn above this ceiling, the savings are currently only 1%. That’s obviously going to have a huge effect on firms where, for example, the majority of employees are higher rate tax payers."

As always, all is not as it first appears. The catch is that the exemptions apply solely to registered childcare, which only includes DfES/Ofsted-approved nannies, Ofsted-registered childminders, nurseries and play schemes and school clubs. Childcare in the child’s own home is excluded if provided by a relative (see box, left).

To obtain approval, the nation’s potential army of childcarers must show qualifications, undergo first-aid training and submit to criminal record checking.

Which is why speedy communication of the changes to staff is crucial. Helen Harvey, head of payroll services at payroll company, Nannytax, says: "Employees need to get their applications in as soon as possible. They can’t just leave it until the beginning of April, because chances are your nanny’s not going to get approved by the beginning of the tax year and the Inland Revenue will not allow retrospective approval."

Employers need to ensure that employees on maternity leave are notified about the changes. Jill Haynes, chief executive of the National Childminding Association, says: "Employers really have got a big information job to do on employees and need to be taking expert advice about where their employees can get approved or registered care."

The rule will have more effect on some organisations than others. Cadbury Schweppes has been running a childcare voucher scheme for seven years. Employee benefits manager, Sue Laverick, says she will be taking little action as most staff at the firm already use registered childcare anyway.

So what will be the knock-on effects for employers? Stephen Burke, director of the Daycare Trust, predicts that media hype will prompt a rash of requests for vouchers from staff. "You will probably see a massive explosion in the provision of vouchers, probably to the stage where about one-in-four employers within a year will be giving some help with the cost of childcare," he says.

"It’s right up the public agenda and definitely parents will be putting pressure on employers to do something. There’s no doubt that there’s going to be a groundswell of opinion and parents wanting them as a condition of part of their employment. Employers will face peer pressure and competition from other employers."

However, not all organisations are jumping for joy over the changes. Some employers have been scooping up savings from the fact that, at present, there is no ceiling on the amount of vouchers that can be taken free of NI. This will now be capped at £50 – in line with tax.

Grass Roots Group’s Lister says: "Some employers which use childcare vouchers to obtain a Revenue saving will find they save less money per employee. But, because the take-up is likely to go up, it means that they will probably save more money over time. Some employers use the NIC saving that they make to give a discount to staff. Because they haven’t got as much money to pass on they are needing to rejig their scheme."

Albeit an expensive option, having a nanny (either live in or live out) has always been a highly desirable form of childcare because it can be the most flexible for parents. So by bringing nannies into the registered fold it provides parents with the chance to extend the use of their vouchers and the Chancellor will not penalise families who want to share a nanny with another household.

A side benefit will be that employers can club together and share nurseries. Childcare on work premises will still be free of tax or NICs. But, from April, staff from other organisations on the same site will be able to use your facilities and benefit from the exemption.

Although voucher schemes are non means tested, working tax credits are. These tax credits (which benefit families on incomes up to £59,000 per year or two-earner householders on median income of £34,000) will help parents but only when they spend on approved nannies or registered childcare.

Employers and parents may welcome the reforms, but most experts recognise that there is a way to go. While the £50 voucher ceiling will offer a boost to family bank balances, it falls way short of the actual cost of childcare. Nevertheless, the mood is quietly optimistic. The Work Foundation’s Jones says: "It does have the potential to help women, in particular, stay in work or help them work the hours they want to. It’s definitely a step in the right direction. The devil is in the detail and how it’s implemented".


What will the changes mean for employers? From April 2005, if you offer staff childcare vouchers, the first £50 a week of the cost of providing vouchers will be free from tax and NI. Administration costs or management fees are also tax free.

What’s the catch? The vouchers must be available to all employees and are only valid for registered or approved childcare.

What is registered childcare? Registered childminders, nurseries, play schemes and after school clubs. Nannies under ‘approved’ schemes.

How can childcare providers get registered? Any unregistered nannies, friends or family members will need to registered with Ofsted before April. Childcare by relatives, and provided in the "child’s own home", will not be eligible, unless childminding is the relative’s primary business and the fact that the child relative attends is incidental. The Sure Start Unit’s website at uk provides more information.

Does the ceiling change according to the number of children being looked after? No, the vouchers are per employee not per child.

To qualify for the tax and NIC exemption, what is the age limit for the child? Up to 1 September following the child’s 15th birthday (or up to 1 September after the child’s 16th birthday if they are disabled).

Where can I find out further information? Go to childcare

Case study

The Ministry of Defence in Glasgow has won wide acclaim for its childcare voucher scheme.

Liz Harrison, deputy civil secretary for the army personnel centre, says: "It’s an unqualified success and has made a real impact on recruitment and retention."

Sign up to our newsletters

Receive news and guidance on a range of HR issues direct to your inbox

This field is for validation purposes and should be left unchanged.

Some 190 MoD staff have benefited from the scheme since it was introduced three years ago. "Feedback from staff has been tremendous," she says. "For some, the cost of childcare is almost like another mortgage. People told us that if it wasn’t for childcare vouchers then [they] wouldn’t be able to come back [to work]."

She concludes that their success has been founded on the premise that "existing childcare arrangements are more flexible than workplace nurseries".