What are Childcare Vouchers, what changes are coming and when will they happen?

The Childcare Voucher scheme is a Government initiative which enables parents to save money on their childcare costs, the value of which is estimated at almost £1,000 per year. The vouchers may be used by parents with children aged up to 15 years and enables them to pay for childcare out of their gross salary, i.e. pre-tax and national insurance. The scheme was due to end on April 5th and be replaced by a new scheme called Tax- Free Childcare. However, following discussion in Parliament, it was agreed that Childcare Vouchers will continue to be offered until at least October 2018, although a firm date has yet to be agreed.

How are the two schemes different?

In a nutshell, Childcare Vouchers are administered by employers, and not all employers offer the scheme.  In contrast, Tax-Free Childcare will be administered by the Government and does not need to involve employers, although you can materially help your staff with the scheme as part of your wellbeing programme if you wish.  We outline how you can do this below.

Both schemes benefit working parents by reducing the cost of childcare, although there are likely to be ‘winners’ and ‘losers’ when the change happens, depending upon how much parents spend. Below you will find a table which summarises the financial impact between the two schemes.

What are employers’ responsibilities regarding Childcare Vouchers and Tax-Free Childcare?

The two schemes – Childcare Vouchers and Tax-Free Childcare – operate quite differently.

Childcare Vouchers

As an employer, you may decide to operate the scheme yourselves, or contract with a company offering the service to keep administration to a minimum. Childcare Vouchers can be offered either as a benefit-in-kind on top of existing pay, as part of a flexible benefits package, or most usually as part of a salary sacrifice scheme.

For example, if the parent is a basic tax payer, by sacrificing £1,000 of their salary they will receive the equivalent of £1,000 in childcare vouchers; however, once the normal tax and NI deductions have been taken into account, the cost in lost salary is only £700.

Tax Free Childcare

As an employer, you will not be legally required to participate in the new scheme. It is also important to note that neither are you responsible for establishing eligibility; this will rest with the Government administration.

It will work by parents setting up and paying into their own childcare accounts online. The Government will then contribute 20% of the childcare costs, set as a maximum of £2,000 per child per year. For those parents with disabled children, they may benefit from up to £4,000 per child annually.

Although as an employer you do not have any formal obligations, there are two ways in which you can help. You may provide information by directing parents to the Government website portal, for example before or after an employee takes any family-related leave and/or pays into the scheme if they choose to. You can also use your payroll system to pay directly into the parents’ childcare account from an employee’s net pay or make extra payments into their account without reducing the employee’s net pay (any extra payments will be treated as earnings).