Childcare vouchers – where are we now?

Reminder re tax efficient childcare arrangements

There are generally three different types of tax efficient childcare options that can be available from an employer:

• 1. Employer provided childcare (ie. provision of a workplace nursery).
• 2. Where an employer contracts directly with a childcare provider to provide services.
• 3. Childcare Vouchers - where employers provide (or arrange provision of) vouchers to staff for future childcare.

Currently, employer provided childcare is wholly exempt from tax and national insurance, whereas employer contracted childcare or vouchers are exempt, but only up to a maximum of £55 per week. This £55 per week limit is available per person, and therefore may be available to two working parents.

Employer contracted childcare and childcare vouchers will be affected by this change, but not employer provided childcare.  Those joining a scheme from 6 April 2011, or those in a scheme but changing employment after that date, will have the amount that can be received tax free restricted based on an annual "basic earnings assessment" carried out by their employer.  The amount of weekly tax free vouchers for a higher rate taxpayer will then be restricted to £28 per week, and for 50% rate taxpayers to £22 per week. 

Assuming both parents are 40% taxpayers, the tax saving of childcare vouchers for those not affected by the new rules can be up to £2,288 per year (plus a small amount of employee national insurance of £57). The employer can also save national insurance of up to £732, which may cover the costs of appointing an agency to administer the scheme, or they can run it themselves. Even for a single basic rate taxpayer, the tax saving would be around £572 per year; with the employee and employer saving national insurance of as much as £314 and £366 respectively. 

One major advantage of childcare vouchers is that there is no statutory requirement for a voucher to be used in any particular week or tax year, so they can be stockpiled for future qualifying expenditure. Vouchers can be used for pre-school childcare, and also for school age children (up to age 15) to pay for 'out of hours' care such as breakfast or after-school clubs. They can also be used for any part of school fees that do not relate to 'compulsory education' - for example boarding costs.

If you wish to discuss childcare vouchers, or your options as en employer to provide childcare benefits to employees, please contact your local office or email your enquiry.