Childcare vouchers and salary sacrifice explained
In an effort to reduce the costs of childcare for working parents or legal guardians, the Chancellor announced that from 5 April 2005 employers can provide childcare vouchers up to a value of £50 per week free from tax and national insurance contributions. Human resources consultant Sandra Beale explains how the scheme works.
To take advantage of this tax beneficial offer the employee formally agrees to give up part of their salary in exchange for the vouchers. This is known as salary sacrifice. Their employer also needs to have negotiated and implemented a voucher scheme with an appropriate provider.
This is a positive move that will encourage employers to provide assistance with childcare costs and mutual tax savings. The average employee, for instance, can save up to £850 per year by not paying 11% national insurance contribution and standard rate tax on the vouchers. Employees paying higher rate tax can save over £1,000 per year.
Any scheme that is implemented needs to be open to all employees not just to specific groups of staff. Both parents who are working can claim the benefit on the same child. Some employers, however, may restrict the eligibility for childcare vouchers to providing them only for children under the age of five.
The salary sacrifice scheme operates by the employer deducting an agreed amount from the employee's earnings, which is then passed to the voucher company. Vouchers are then issued either to the employer to distribute to staff or direct to the employee to pay the registered childcare provider. There is no limit to the amount of childcare vouchers that can be issued but anything over £50 per week will be subject to national and tax deductions.
Registered childcare providers can include day nurseries (private, community or local authority), workplace nurseries, childminders, pre-school playgroups, nursery schools, out of school clubs and holiday clubs.
Unregistered child carers, such as nannies, will not be able to take part in the voucher scheme unless they become approved through a new voluntary approval scheme, which the government is currently setting up. They will be required to produce an enhanced Criminal Records Bureau (CRB) check, show an understanding of childcare by, at the bare minimum, attending an induction course on caring and hold a valid paediatric first aid certificate.
The carer or organisation responsible for childcare needs to be registered with the administering voucher company cost-free. They will provide their contact details, registration number and bank account details. The voucher company will then pay them directly into their bank account on receipt of the redeemed vouchers.
Most schemes are currently paper-based, but some are internet-based or e-voucher schemes. The administration charges are picked up by the employee's company.
Committing to salary sacrifice is a variation of terms and conditions which requires the implementation of the appropriate consultation and agreement procedure. The contract is then updated or a separate agreement signed reflecting the change. The reduction in salary the employee has agreed to, the amount they should receive in vouchers and the time length should all be clearly detailed in such an agreement.
In general the agreed period is one year and should employees wish to stop receiving vouchers and revert back to their usual salary or increase the value of vouchers received during this time, they may not have an automatic right to do so; this will depend on the clauses in the agreement. It may be possible to include a clause relating to an earlier review in case of a lifestyle change linked to birth, death or marriage.
Before entering into a salary sacrifice scheme for childcare vouchers, employees should be wary if receiving child tax credit and working tax credit. Also statutory maternity pay and statutory sick pay is based on average earnings and substitution of the corresponding value in childcare vouchers is not included. Employees should consult with their employer and/or tax office to fully understand the implications.
A further concern is whether under a salary sacrifice scheme the employee's salary is treated as being net (excluding the value of the vouchers) or gross (including the value of the vouchers) for the purpose of employment conditions. This has implications for calculating pay awards and bonuses, pension and redundancy awards and possibly starting pay on promotion. The government is currently consulting over this issue and will provide guidance.
For more details phone Sandra Beale on 07762 771290, email [email protected] or see www.sjbealehrconsult.co.uk
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Replies (12)
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Producing own childcare vouchers
I have just recently attended the Employers Talks from the IR and asked the specific question about producing our own childcare voucers to save on the 7.5% admin charge for using a voucher agency. They have confirmed that this is allowed, and I there is also reference to this in the Employers Helpbook E18, on page 6.
Childcare vouchers and minimum wage
Can anyone please comment on the implications of minimum wage legislation on salary sacrifice schemes providing childcare vouchers.
I have seen some guidance which states that if pay after the sacrificed amount falls below minimum wage the employer will be in breach. Is this correct ? If so does this not make it impossible for low paid workers (below about £6.30 per hour) to benefit from the tax breaks offered.
Bureaucracy rules
I Gordon Brown was serious about helping working parents he would just give each working parent an allowance of £2,500 dealt with through self assessment thus avoiding vouchers, salary sacrifice and lots of admin. Employees would have to be able to prove they spent money on qualifying childcare.
This is all about headlines in newspap
rers and TV when announced but making sure most people can't claim because of bureaucracy.
Voucher scheme also a way of tackling the informal economy
This scheme of vouchers with the "sweetner" of tax incentives has been already been in operation in other european countries for a number of years. There is a saying that "there is no such thing as a free lunch", and although our Gordon appears to be very generous in his voucher offer, there is a hidden incentive for this wily old scotsman!.
The pay back for him is part of a bigger inititive in tackling the age old problem of the "Informal economy".
The definition of Informal economy is -
"Informal work involves the paid production and sale of goods and services which are unregistered by, or hidden from the state, for tax and/or benefit purposes, but which are legal in all other aspects."
This is quite different from the "Black Economy" which relates to illegal activities such as Drug Dealing.
The biggest part of the informal econony is the service industry, and includes gardeners, builders, cleaners, and child care.
A significant number of child carers are small in there operation, and involve a "cash in hand" transaction.
By getting these Friends/relatives, and known friends of friends to register (a qualification in order to use the scheme)Gordon will increase the number of Formal businesses, and therefore increase the amount of Tax, NI, and vat into his "coffers".
This is not intended to be a subversive rant against the current goverment, purely a clarification of the "other" motives behind this seemingly generous act of kindness.
Interestingly the "Home Service Scheme" which has operated in Denmark since 1994 also includes "small jobs" and "gardening", with the goverment reimbursing 40% of the labour costs to a maximum of E7,000(euros)in any given tax year!
So bureaucratic!
Another scheme with complicated requirements and where the tax & other employment implications are dificult to get a grip on.
Surely the level of take-up for anyone other than the really large corporations is likely to be extremly low.
childcare voucher scheme
I have had (verbal) confirmation from the Revenue that it is not necessary to use a voucher provider; a company can create its own vouchers. I don't agree that it is too bureaucratic for small companies; anything which can reduce the enormous cost of childcare for working parents has to be a bonus. My own company with 3 staff, all parents of young children, will certainly be taking advantage of the scheme.
Good news for employers!!
Employers also save employers NIC on the £50 a week which will help to pay for the extra cost of administering the scheme.
It is a good morale booster for working parents using childcare which will offset the annoyance of employees without children and those with a partner looking after the children full time who get no tax saving.
Vouchers or Not
My current understanding is that vouchers (or something similar) are required, but a company can arrange it themselves rather than use an agent. If you've got more than a couple of employees it may be easier to use a voucer supplier though!
The IR website has some useful do's and don'ts on it, but I belive that it boils down to:
The company (or agent) must contract for the childcare.
The company cannot settle bills on employees behalf (thus the voucher arrangement).
The company (or agent) needs to keep certain records (see the IR website again).
Another thought
Mrs Smith, a registered childminder, has one spare place but two possible children. One set of parents will pay with £50 notes the other will pay with £50 vouchers. Can you guess which child will get a place?
Just a technical point
The article says "The salary sacrifice scheme operates by the employer deducting an agreed amount from the employee’s earnings, which is then passed to the voucher company."
No, this describes an employer simply directing a part of the employees salary to a specified purpose - the employee and employer have got to agree a remuneration package with a reduced entitlement to salary - this will affect ability to contribute to pension arrangements at the moment, it will be necessary, unless the employee loses out, to have some record of the value of the package including the sacrificed benefit, and it is important that the benefit cannot be exchanged for a higher salary - if it can be thaen this provides an alternative statutory route by which liability can be measured.
Whilst the statutory scheme here exempts the vouchers, and so gets over the problem of surrender for a higher salary, with other benefits it is important to remember this principle.
There was a news story recently concerning the sacrifice principle as applied to pension contributions, described as the "tax avoidance scheme of the decade" - the revenue confirmed here, as they do elsewhere that a salary sacrifice is simply part of the arrangements between the employer and employee - in fact such a scheme does notr require disclosure as an emplyment product under the avoidance disclosure rules. But it must be genuine, it must be done properly.
The other side of the coin is using the principle of sacrifice to minimise liability by providing a cash alternative to a benefit, thus falling foul of the revenue rules, where the cash alternative then provides the measure of assessability, a few years ago this was quite common for cars - £500 instead of the car and the benefit limited to £500 whilst the car was kept! - but the rules were amended so this cannot work for cars, and a year later accommodation was added - but no other benefits have been - some scope there methinks, if we don't publicise it too widely!
Voucher providers
Do you have to use a voucher provider? Since they all want a fee that makes a substantial inroad into the savings. Surely the main thing is to have a valid salary sacrifice in place and do the Revenue still expect to approve this?
Great news for family companies
Are there any restrictions in providing vouchers when the only two employees are the husband/wife or life partner in the close company? Will a payment of a salary just within the personal allowance plus the £50 vouchers, with balance of cash requirements in dividends, become the accepted tax efficient mix for profit extraction, where other factors such as S660A or IR35 are not in point? Or do we need to sacrifice part of the existing salary so in fact no extra tax savings (NICs not being an issue with minimal salary)? With the benefit of being able to use your own vouchers, providing the rules are followed, this appears to be very beneficial to shareholder director companies.