Childcare vouchers are on their way out, along with salary sacrifice, but the new subsidised savings scheme called tax-free childcare is about to launch. Kate Upcraft unwinds the muddle.
Sacrifice and childcare
Employer-provided childcare vouchers are frequently offered via salary sacrifice, the rules for which are to be amended from 6 April 2017 for some benefits other than childcare. I’ll write about those new rules when the final legislation and guidance appears.
At the same time tax-free childcare (TFC), the replacement for childcare vouchers, will start to rollout from April 2017. This was not due to happen simultaneously with the salary sacrifice changes, but a legal challenge to HMRC’s tendering process has meant that the launch of TFC was delayed until 2017.
From April 2017, there will be two systems that can be used by employees to fund childcare, which are totally different in their operation.
- Employer-supported childcare, usually provided via childcare vouchers.
- Tax-free childcare, which is not connected to the employer at all.
Some fortunate employees also have access to free workplace nursery places, which continue to be a fully tax-exempt benefit if provided by the employer.
This uses the tax exemption that was introduced in 2005, and became marginal rate specific in 2011. It is based on a tax exemption that can be utilised by both parents for the same child, but only if their employer offers a childcare voucher scheme.
At the start of each tax year the employer is required to carry out a basic earnings’ assessment (BEA) for any employees who joined their employer-supported childcare scheme from 6 April 2011 to determine the marginal tax rate for the employee for the year ahead. This then determines the amount of exempt childcare support that can be offered per week to the employee. The current weekly values are:
- £55 for 20% taxpayers
- £28 for 40% taxpayers
- £25 for 45% taxpayers.
Employers and agents should be aware that despite the higher rate tax threshold being held at £43,000 in Scotland, the basic earnings assessment for 2017/18 uses the rest of UK threshold of £45,000 in Scotland as well so that parents are not disadvantaged. This has not been publicised by HMRC but has been confirmed to me in writing.
Tax free childcare
To join tax-free childcare (TFC), the parents must set up a joint online childcare account (JOCA). To be eligible to do so, they must both have earnings (or earnings from self-employment) of at least 16 hours a week at the national minimum wage and maximum household income of £100,000 per parent.
For parents that have newly set up in business there is a start-up period when the minimum earnings are disapplied. As part of the sign-up process for a JOCA, parents are made aware that within three months of taking up TFC they must notify their employer that they are no longer entitled to employer-supported childcare, if they are a member of such a scheme. This notification must be in writing but there is no prescribed format for it.
Parents make a quarterly assessment of their childcare costs per child and deposit those monies into their JOCA. This is topped up by HMRC at a rate of 20%, such that the maximum childcare costs that can be covered per year per child are £8,000 from the parents and £2,000 from HMRC (double this amount is available to parents of disabled children).
Only childcare for children up to the age of 12 will be covered under TFC when it is fully rolled out, by April 2018. Contrast this with childcare vouchers which can be used for children up to the age of 15, and for which tax relief can be provided at the employee’s highest marginal rate if they were members of the scheme prior to 6 April 2011.
For parents who sign up to a JOCA prior to 6 April 2018, there is the ability to return to being members/newly join a childcare voucher scheme if they prefer. However, from 6 April 2018 there will no longer be the opportunity to join, or rejoin an employer’s childcare voucher scheme.
This of course is another direct attack on salary sacrifice. Employers have just over a year to maximise their employer NI saving by encouraging employees to join a childcare voucher scheme, or implementing a new scheme before it must close to any new members. The total saving equates to 14.3% if the employer is also subject to the apprenticeship levy.
As the population within childcare vouchers diminishes it is sensible for an employer to consider moving to self-administered vouchers, rather than using a third-party voucher provider. Equally they may choose to look for a voucher provider with a lower service charge.
It is important that employees and agents consider the move to TFC alongside the other salary sacrifice changes that are being implemented from April 2017. As salary sacrifice schemes are unwound, this will impact the cost of employer pension contributions, and the apprenticeship levy. For employees, the additional taxable income could mean they will be subject to the high-income child benefit charge, which claws-back child benefit paid to the family.