News analysis: Childcare crisis looms

The government’s decision to withdraw tax and national insurance relief on childcare vouchers could have major repercussions, says Nicola Sullivan

The future of employers’ childcare provision for staff has been cast into doubt after the government announced that the tax exemption on childcare vouchers would be abolished.

Many employers are concerned they will not be able to afford to continue to offer the perk once the tax and national insurance (NI) breaks are phased out from 2011 for new schemes, and from 2015 for existing plans. Harsha Modha, director of benefits programmes for the UK at GlaxoSmithKline (GSK), said: “As far as we are concerned, from 2015 we will not be able to offer these vouchers. We are hoping that if there is a change in government, the decision will be reversed and we will be able to continue to offer childcare vouchers and receive the tax exemption.”

Martin McPhail, HR officer at the Gleneagles Hotel (right), which implemented childcare vouchers in July, is also concerned, but said the company was planning to sit tight for the moment. “We made the decision to implement [childcare vouchers] and I think if, after three or four months, we pull the plug on it, it would not look good.”

Introducing childcare vouchers†

Other employers already seem to be reconsidering introducing childcare vouchers for staff, or making changes to their scheme. For example, provider Apple Childcare Vouchers has said some potential clients have held off implementing vouchers for the first time, while others looking to switch providers have been reluctant to do so.

Employers such as GSK, where 10% of staff have taken up the benefit, have also raised concerns about the impact of the government’s plans on staff retention. At the moment, childcare vouchers that are offered through salary sacrifice can save a working parent up to £1,195 in tax annually, and are often offered by employers to encourage parents to return to work after the birth of a child. The benefit also helps to reduce absence caused by parents struggling to balance childcare with work.


Stewart Pickering, director of Apple Childcare Vouchers, said: “Employees are already struggling to pay the rising costs of childcare. Taking away such a benefit could make childcare unaffordable and result in employees leaving the workplace.”

HM Revenue and Customs (HMRC) is currently unable to confirm whether or not an employee who has signed up for childcare vouchers before 2011 will be entitled to tax relief if they change jobs between 2011 and 2015. However, it has said further details about how the changes will work in practice will be outlined in the pre-Budget report later this month.

Many employers will not be in a position to contribute towards the cost of vouchers for staff once the tax and NI breaks have been removed. This will undoubtedly raise questions about how they can best advise their staff on managing childcare going forward.

Some help for working parents will be available from the state. For example, working tax credits are available for low-paid staff who work more than 16 hours a week. Also, families on incomes of up to £58,000 a year (or £66,000 if there is at least one child who is less than a year old) can benefit from a child tax credit whether or not they are working. Meanwhile, three- and four-year-olds are entitled to 12.5 hours of free early learning or nursery sessions a week, for 38 weeks of the year. In addition, the 250,000 new nursery places for two-year-olds for 10 hours a week, which the government intends to fund by cutting tax relief on childcare vouchers, are designed to help parents on low incomes.

However, as it stands, state-funded provision will be difficult for some parents to get because it is means-tested and will not always be practical for those that want to return to work full time after having a child. Emma Knights, joint chief executive of charity the Daycare Trust, said: “Free childcare places make some contribution, but it is unusual for working families’ childcare to be provided entirely through free nursery education, simply because of the hours that are on offer.”

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