Childcare Vouchers are an employee benefit for all eligible working parents but with the current system changing in October, anyone thinking about it should act now. Joanne Gibson takes a closer look.
Childcare Vouchers are a Government approved, tax-efficient way of paying for childcare and are an employee benefit for all eligible working parents. And for those parents who choose to join the scheme, this can mean that they can exchange up to £243 a month (£55 a week) of their gross salary for Childcare Vouchers.
Most employers who provide Childcare Vouchers do so through a salary sacrifice scheme. This means that eligible employees agree to reduce their salary by a certain amount and receive Childcare Vouchers to the same value but pay no tax or National Insurance on these vouchers. They can save many parents with kids aged up to 15 over £1,000 a year on childcare, the key advantage being that parents can pay for childcare from their PRE-TAX and national Insurance income.
You give up £1,000 of salary, after tax and NI it’s only worth around £700. In return, you get £1,000 of vouchers, meaning that you are £300 better off.
The scheme was meant to close to new applicants in April but this has now been extended, meaning that parents have still got time to join the scheme. Parliament voted to extend the deadline for joining the Childcare Vouchers Scheme by 6 months, meaning that it will now close to new applicants on 4th October 2018. After that the Government will roll out the Tax-Free Childcare (TFC) scheme to replace Childcare Vouchers.
How many vouchers?
Basic-rate taxpayers can pay for up to £243 of childcare with vouchers each month (£55 per week). This is per parent, so two working parents could get £486 of vouchers each month.
The limits in terms of vouchers you can buy are:
• Basic-rate taxpayer: £55/week voucher, maximum annual tax/NI saving £933.
• Higher-rate taxpayer: £28/week voucher, maximum annual tax/NI saving £625.
• Top-rate taxpayer: £25/week voucher, maximum annual tax/NI saving £623.
The number of children doesn’t affect this, so the limits are the same for one child or more. Meaning that for parents who can’t meet their entire childcare costs using the vouchers, they will have to pay the additional amount direct to the nursery or childminder.
Changes to Childcare Vouchers
From 5 October 2018, Childcare Voucher schemes will close to new applicants. Parents may be able to get Tax-Free Childcare instead. Parents can keep getting vouchers if they’ve joined a scheme and get their first voucher before the scheme closes in October 2018, as long as they stay with the same employer and they continue to run the scheme. Also that they do not take an unpaid career break of longer than a year.
They cannot continue to claim Childcare Vouchers if they successfully apply for Tax-Free Childcare. Employees must tell their employer within 90 days if they get Tax-Free Childcare. They’ll then stop giving out new vouchers.
They can continue to use any vouchers that they already have, including to make a joint payment for childcare with Tax-Free Childcare. There’s no deadline for using the vouchers. Once they’ve told their employer that they are getting Tax-Free Childcare, they cannot re-join their voucher scheme.
If they are already a member of a Childcare Voucher scheme though, they will be able to continue for as long as your employer runs the scheme, or as long as they stay with their employer.
The new Tax-Free Childcare scheme gives eligible families an extra 20% towards childcare costs. In total they’ll be able to use this new scheme to pay for childcare of up to £10,000 per child each year – meaning they could get an extra £2,000 per child each year.
However, the new scheme won’t be favourable for everyone. Some families will win under the new scheme while others will lose. A lot depends on how much they earn, how much tax they pay, and how much they pay for childcare. Here are the benefits for each.
Tax-Free Childcare will benefit:
• Self-employed people or couples who earn less than £100,000 each, as they are eligible for Tax-Free Childcare but can’t get Childcare Vouchers.
• Parents with more than one child and high childcare costs, as the help available goes up with the number of children. There is a limit for Childcare Vouchers as this isn’t dependent on the number of children.
Childcare Vouchers will benefit:
• Couples where one of the parents does not work, as they’re not eligible for Tax-Free Childcare, but the employed parent is eligible for vouchers (provided that their employer offers a scheme).
• Basic-rate taxpayer parents with total childcare costs of less than £9,336. Under this amount and the saving with Childcare Vouchers exceeds the saving you can make with Tax-Free Childcare.
• Higher-rate taxpayer parents with total childcare costs of less than £6,252. Under this amount and the saving with Childcare Vouchers exceeds the saving you can make with Tax-Free Childcare.
• Higher earners, as anyone earning £100,000 plus isn’t eligible for the scheme, whereas they can get Childcare Vouchers.
As you will see, the new system does away with Vouchers completely and the onus will be on the employee to apply for Government funding via an online account. We hope that this article has helped to explain the benefits of the Childcare Voucher scheme and the new Tax Free Childcare system to you and if you feel that the former is better suited to you and your individual circumstances, then we would encourage you to take action now.
As ever, please do not hesitate to get in touch with us for advice on the issue and how it might affect you.