Working parents need to consider their options before moving to the new scheme
Many employers believe that offering childcare vouchers improves retention rates and the family-friendliness of their business. The vouchers can be used to pay for nursery care, or an Ofsted registered child minder for children aged 15 and under, or 16 if the child is disabled.
Up until 6 April 2011, employees were able to receive up to £55-worth of vouchers per week tax free, regardless of their level of earnings. Employees who joined their employer’s scheme after that date qualified for tax relief at the basic rate, so basic rate tax payers could continue to receive up to £55 per week of vouchers tax free, whereas higher rate tax payers could only receive £28 worth tax free. Both employers and employees saved on national insurance contributions.
The government announced plans last year to overhaul the existing voucher scheme and replace it with a new tax-free childcare scheme, with the aim of providing better support for parents. Draft guidance (PDF) was published on 16 October 2014 and the scheme was confirmed earlier this year. It is intended to be phased in this autumn and will be delivered by HMRC.
The new arrangements have been described as a ‘top-up’ scheme as it will provide a maximum of 20 per cent of a working family’s annual childcare costs, capped at £2,000 for each child up to the age of 12, or 16 if disabled. There will be no limit on the number of children parents can claim for. The scheme will be available for single parents with a salary of up to £150,000, or working couples with a combined salary of up to £300,000, including self-employed parents for the first time. Where eligible, parents will be entitled to support for a period of three months at a time, for each child. This means that every three months parents will need to reconfirm that they remain eligible.
Once the new scheme comes into force, employers will not be able to offer childcare vouchers to new employees. Even those employees who change employer within the same group of companies, and who are benefitting from the existing voucher scheme from their employer, will be treated as a new employee for these purposes. Employees will be allowed to join the new scheme if they wish, but will also have the option of continuing to receive childcare vouchers from their employer until the current scheme is wound down, provided they remain with the same employer.
The new scheme is already seen by some as being over complicated, largely due to the fact that employers will play no formal role from an administration perspective. Instead working parents will be solely responsible for setting up and managing their own accounts through National Saving and Investments. The system will be administered via what is described as a “simple” online account whereby parents can buy vouchers online to pay for future childcare.
Unlike the current scheme, households with two parents but where only one is working will not have access to any financial support under the new scheme. As a result those families who are eligible will need to apply for the old-style voucher scheme, and should do so as soon as possible.
There is also concern that some working families will be worse off under the new scheme. Much depends on how much working families pay towards childcare during the year. Worked examples suggest that a working couple with one child, paying around £5,000 a year for childcare, would be worse off, but if they had two children and are spending £5,000 on each child, they would be better off.
Working parents, therefore, need to give careful consideration to any decision to join the new scheme.
Michael Briggs is a senior associate in the employment department at Shoosmiths
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