Implications of the October 2015 childcare voucher changes

As many employers will know, there is just over a year to go until the introduction of tax-free childcare (TFC), a government initiative aimed at supporting parents with their childcare costs.

If you read nothing else, read this…

  • Tax-free childcare will be introduced in October 2015.
  • Working parents who are not in receipt of childcare vouchers at that date will go into the new scheme.
  • The change will have significant tax and cost implications for both employers and working parents if neither prepares for it in advance.

This new scheme will provide 20% of working families’ annual childcare costs, capped at £2,000 for each child. For employers, TFC could have significant consequences for their family-friendly working practices.

More than 50,000 employers currently offer the popular employer-supported childcare scheme, or childcare vouchers, which parents receive through a salary sacrifice arrangement. Through this scheme, employers and employees both save on national insurance (NI) contributions, and employees also save on income tax.

For a two-parent, basic-rate taxpaying family, the scheme can save them £1,866 a year on childcare costs. By comparison, the same family would have to be spending upwards of £9,330 a year on childcare costs to reap the same level of support from TFC. According to the Department for Education’s Early years survey, the annual mean spend of families is closer to £5,000.

The design of the new scheme is very different from childcare vouchers, and there will be no formal role for employers. Parents will be solely responsible for setting up and managing their accounts with public-sector body National Savings and Investments. However, the government expects employers to remain a source of information for their staff about TFC, and the potential benefits it brings.

Next year will see the last opportunity for employers to offer childcare support to new staff or new parents, given there will be no formal role for them under TFC. A survey of 1,600 businesses by the Childcare Voucher Providers Association (CVPA) found that 65% believe offering childcare vouchers improves retention rates and 94% think it improves the family-friendliness of their business. Employees agree: only 9% of parents believe removing the role of employers is a positive development.

So what do employers need to do to mitigate the negative consequences of moving to TFC? Firstly, ensure they are signed up to a childcare voucher scheme because not everyone will benefit from TFC. Unlike childcare vouchers, households in which only one parent is working will not have access to financial support. Employers should make sure they have a childcare voucher scheme in place, so parents can determine which scheme works best for them.

The CVPA also recommends that employers consider how important the childcare voucher scheme is to their business, both as a family-friendly benefit and as a form of tax relief.

The current childcare voucher scheme provides employers with NI savings worth up to £402 a year per scheme member. Without these savings, employers may not be able to fund other employee benefits that they offer. This could have significant implications for recruitment and retention.

A CVPA survey of 40,000 parents has shown that 20% would be forced to leave work if the support they receive through the scheme is no longer available to them. Given that about 550,000 parents currently use childcare vouchers, removing this support could see more than 100,000 people leave the labour market.

Employers need to understand what the changes mean for them on a practical level, and what they can do to ensure working parents continue to receive this form of support. 

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Fiona Shields is chair of the Childcare Voucher Providers Association