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Preparing for the end of childcare vouchers

16th Mar 2017
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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.

Parallel systems

From April 2017, there will be two systems that can be used by employees to fund childcare, which are totally different in their operation.

  1. Employer-supported childcare, usually provided via childcare vouchers.
  2. 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.

Employer-supported childcare

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.

Employer’s position

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.

Replies (5)

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By TheStuartMiller
16th Mar 2017 14:49

Great article Kate. As someone who is due to become a parent for the first time any day now this has been really useful. Thanks very much.

Thanks (2)
By cfield
20th Mar 2017 20:10

Good to know that we have another year yet to roll out childcare vouchers to new limited company clients. Those PSC owners without kids have the next 3 months to get a bun in the oven. There should be a noticeable dip in the sale of condoms this Spring. Hope it doesn't affect GDP too much. Expect some special offers at Boots the Chemist.

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By lisaknowles
23rd Mar 2017 11:41

Another blow to parents who work under 16 hours a week though (either by choice or through lack of opportunities). Along with changes to Universal Credits due to be introduced soon that will mean no support if both parents aren't working over 16 hours a week by the time children are school age, on a social scale this seems to be a double pronged attack on people who already struggle to find solid regular part time work that can fit around childcare commitments.

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By FaF
23rd Mar 2017 11:43

Agreed, brilliant article. Am I correct in thinking that the companies who provided the childcare vouchers are the ones who will provide employees with the 'JOCA' account and if employees enquire about the new scheme, it would be childcare voucher companies that we would point them to?
Thank you.

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By alanchaplin
23rd Mar 2017 12:04

Good timing - I received email from the government about their site relating to this today too

tax credits and universal credit can play a part too.

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