Employer Childcare Voucher Schemes � An Update (Dec 2010)

If any of your employees pay for childcare, the introduction of a Childcare Voucher Scheme as a method of payment could help your staff save £1,000s a year in tax.

Childcare vouchers are not new and many employers have already adopted their use, but if you are an organisation that has yet to make them available this scheme is certainly worth considering. If you do use a voucher scheme then you may wish to re-communicate the benefit to ensure that staff are aware of the changes to the rules due in 2011.

As you may know there are some potential pitfalls for lower income groups and also some changes for higher earners. It may therefore be worth reviewing the changes and then communicating the key issues to your staff, in order that they can make an informed choice for their personal circumstances in the New Year.

Childcare vouchers are a special government scheme operated through employers that allow members to pay for childcare from pre-taxed salary. This can generate some significant tax advantages and save individuals very worthwhile amounts of money.
As with many benefits, the key to successful implementation and appreciation is the clear communication and understanding of the advantages and disadvantages.

How they work

Childcare vouchers can save many parents with children aged up to 15 over £1,000 a year on childcare costs. The scheme is only available via employers, and many large and small companies have introduced them.

The key is that the vouchers enable employees to pay for childcare from their salary before tax and National Insurance is deducted. While this may not sound much, the benefit can be significant.

Using 'salary exchange'

A few employers have adopted the vouchers as part of their remuneration package and will simply provide the vouchers on top of normal salary, but most schemes utilise the 'salary exchange' mechanism. Here is an example for a basic rate tax payer.

Employee gives up £1,000 of salary, in reality that would only be worth around £700 in �take home pay�. However by receiving the vouchers from pre-taxed pay the £1,000 pounds is not reduced and the employee has £300 more to spend. For an accurate figure of savings look at the HMRC calculator at http://www.hmrc.gov.uk/calcs/ccin.htm

For staff in receipt of tax credits, it is imperative that they check to see if they will be better off using vouchers via salary exchange. As an employer it is vital to keep clear and concise records as is adopting a reference salary to ensure other company benefits are not affected and that when the vouchers are no longer required the correct salary level can be easily re-instated.

How many vouchers can be bought?

An individual can pay for up to £243 of childcare with vouchers each month (£55/week). This is PER PARENT so two working parents could get £486 of vouchers a month. The number of children does not have an effect on the amount; the limit is the same whether a parent has one child or five!

Vouchers are not specific to each child and have a long expiry date, so if a parent knows they will incur higher childcare costs in the near future it is worthwhile obtaining the maximum allowance ahead of time.

Many providers will enable backdating of vouchers by up to six months, although a child must be born for a parent to be eligible. Check your individual provider's procedures first.
Higher rate taxpayers should join now!

Childcare voucher changes are due in April 2011

In the June 2010 emergency budget the government announced major changes in the amount of vouchers allowed for higher 40% and top rate 50% tax payers. Here is an overview.

Current situation (per parent):

Basic (20%) Taxpayer. Allowed £55/week vouchers, maximum annual gain £890.
Higher (40%) Taxpayer. Allowed £55/week voucher, maximum annual gain £1,170.
Top (50%) Taxpayer. Allowed £55/week voucher, maximum annual gain £1,460.

New joiners after April 2011 (per parent):

Basic (20%) Taxpayer. Allowed £55/week vouchers, maximum annual gain £920.
Higher (40%) Taxpayer. Allowed £28/week voucher, maximum annual gain £610.
Top (50%) Taxpayer. Allowed £22/week voucher, maximum annual gain £590.

Where previously the scheme benefited higher earners disproportionately, these changes were meant to give roughly the same maximum tax gain for all taxpayers, yet when next year's changes to national insurance are factored in, basic rate taxpayers do much better.

However it is worth noting that if employees are already in the scheme by April 2011, then they can continue to get the current amount of vouchers.

Communicating these changes to higher rate tax payers is therefore important and if you have yet to adopt a scheme now would be a good time to implement one as joining prior to April 2011 is highly worthwhile for higher taxpayers. The majority of vouchers have a long date on them (e.g. three years) so by securing them now your staff will be much better off in the long run.

The details

The vouchers cover childcare up to 1 September after a child's 15th birthday (16th if they are disabled).

The childcare provider, i.e. nursery, playgroup, nanny, child minder or au pair must be registered and regulated.

An employee can contact their local Families Information Services (FIS), who should be able to inform them about the provision available in their particular area. The FIS number is 0800 234 6346 and the website is http://childcarefinder.direct.gov.uk/childcarefinder/

Those employees with relatives that look after a child in the child's own home will not be eligible to receive the vouchers. Yet vouchers can be claimed for carers that are registered childminders looking after a child in their own home.

Further help with childcare costs

There are now other schemes in place to help with childcare costs, including tax credits, holiday provision, and, from September 2010, at least 15 hours a week free childcare (to be spread over at least three days) for all three and four year olds for up to two years before they reach school starting age (term time only).

Setting up a scheme

Setting up a Childcare Voucher scheme should not be costly for an employer and indeed there are NI savings that will benefit the company or organisation.

Employers can offer voucher schemes one of two ways, either by operating the scheme internally or by using one of the many voucher companies to do all the administration. The fee for this should be less than the savings in NI, so this can be a cost effective solution and enable the scheme to be set up correctly and with minimal resources from the employer. It should also ensure that any changes to the scheme rules are properly adopted and communicated in the future.

While many people can save by using vouchers employers should be aware of the impact on the benefits package overall, especially any salary related benefits and the impact that voucher adoption via salary sacrifice will have.

A major impact on childcare tax credits.

Employers should be aware that there is a problem for people who have children and the overall family income is below £42,000 a year. Getting childcare vouchers reduces eligibility for tax credits; overall this can leave a parent with less money to spend.

There's a useful calculator on HM Revenue & Customs web site which calculates whether an employees would be worse off using the voucher scheme. See http://www.hmrc.gov.uk/calcs/ccin.htm

Do not hesitate to contact Cartlidge Morland�s employee benefits team for advice and guidance. Cartlidge Morland are a �whole of market� and advice led consultancy and we can help you select the most suitable method of implementing and communicating the benefit, as well as establishing if there would be any impact on other benefits that you provide or plan to introduce.

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services

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