Child Care Vouchers

Childcare vouchers were introduced in 2005 to encourage more employers to help employees with their childcare responsibilities. However the Government has recently realised that far too many middle class and higher rate tax payers were getting this benefit and they want to re-direct the tax relief to provide more childcare for lower income families. So earlier this year the Prime Minister announced the Government's plans to remove the tax and national insurance exemption on childcare vouchers over the next five and a half years.

Since this announcement, there’s been a bit of a backlash with over 90,000 people signing an online petition to review their proposal. So we don’t yet know if the change is going to happen. However assuming the change does happen, provided you are using the scheme before 31st March 2011, your benefits will be protected until 31st March 2015. So, I’m just going to explain how the benefits work and why you might want to consider doing something sooner rather than later, if you or your employees have children and need childcare.

Provided various conditions are met – such as the childcare is registered or approved (ie you can’t get your mother-in–law to help for the day and hope to qualify) and you offer the benefit to all staff - you can give your staff £243 per month free of tax and Class 1 NICs. So for a member of your team that is paying basic rate of tax that’s a monthly saving of £80.19 or £962.28 a year.

In addition as the employer you could also be saving another £373.25 a year in employers National Insurance.

To set it up you can use a third party such as Computershare Voucher Services or Accor Services but having implemented the scheme at Essential Money over 2 years ago for all the staff here, it is very simple to do it yourself and avoid paying the administration fee.

All you need to do is produce a voucher – examples are on the HM Revenue & Customs website - which your employee gives to the nursery or childcarer. The voucher is then returned to the employer to pay.

It’s key that the employee takes a reduction in their income, often called “salary sacrifice” to fund the vouchers, otherwise you’ll end up paying for their childcare costs. So if you are paying your receptionist £15,000 a year and they pay £243 a month in childcare costs, you write a letter to them amending their contract to £12,084. You then pay the nursery directly and the employee pays the balance.

You should ensure your employees understand the impacts on benefits, especially tax credits. There’s a very useful tax credits calculator available on www.hmrc.gov.uk. It could also affect their pensions, income protection and the amount they can borrow for a mortgage, so make sure they seek advice before they sign up to the scheme.

This can also work for any principals that have recently incorporated as they will now be classed as employees. You don’t need to do salary sacrifice either so it’s even simpler – just print off the vouchers. If both parents are higher rate tax payers and claim the full amount, they can save just under £10,000 in tax and NI between now and 2015!