Childcare costs are a big concern for working parents and there have been some major changes to the support available in recent years. Emma Rawson explains the options that remain open to parents and employers.
Until recently, childcare vouchers were a very popular way for employers to help with childcare costs.
Typically, employers supply vouchers to employees (usually under salary sacrifice arrangements) which the employees use to pay for their childcare costs. The main advantage is that, subject to a maximum weekly or monthly limit, the employee is not subject to income tax on the vouchers received and there are no employer or employee Class 1 NICs.
However, tax and NIC relief was withdrawn for new applicants to childcare voucher schemes from 4 October 2018. If an employee wasn’t already receiving vouchers at that date, they can still sign up to their employer’s scheme but income tax and NICs will be due on the full value of the vouchers.
Employees who were already receiving vouchers on 4 October 2018 can continue to benefit from the tax and NIC advantages provided that:
- they stay in the same job; and
- any gap in claiming vouchers (eg during maternity leave) doesn’t exceed 51 weeks.
The changes to the taxation of salary sacrifice arrangements from 6 April 2017 do not affect childcare vouchers.
Tax-free childcare accounts
Tax-free childcare (TFC) was launched in April 2017 as the intended replacement for childcare vouchers.
Unlike childcare vouchers, TFC operates independently from employers. Parents set up an online account which they use to pay for childcare. Contributions into the account are topped up with the equivalent of basic rate tax by the government, ie £2 for every £8 parents put in, up to the following limits per child:
- £500 per quarter, or £2000 per year;
- £1,000 per quarter if the child is disabled.
Although the parent effectively gets basic rate relief on the cash they deposit into their TFC account, the lack of salary sacrifice means there is no higher rate tax relief and no NIC benefits for either employee or employer.
Which is best?
Employees can either claim childcare vouchers or TFC, but not both. If parents weren’t already receiving vouchers on 4 October 2018, they won’t get the tax benefits if they sign up to childcare vouchers now. That probably makes TFC the best answer for them.
What about those parents who are currently receiving vouchers? Should they stick with them or move to TFC? The answer will depend on personal circumstances, including level of earnings, childcare costs and the number of children. Parents need to look closely at their own circumstances in order to decide which is best for them.
As a general rule, the following parents may be better off under TFC:
- those with more than one child, as the benefit receivable under TFC increases for each extra child, whereas the weekly or monthly childcare voucher limits do not.
- Parents with high childcare costs which exceeds the maximum value of vouchers that can be claimed.
By contrast, the following may be better off sticking with childcare vouchers:
- Couples with only one parent working or with one parent on very low earnings, as TFC requires both parents to be working and earning at least £120 per week.
- Individuals earning over £100,000, as if either parent earns above this level TFC isn’t available.
- Parents with a single child and/or low childcare costs, where the full cost of childcare is covered by vouchers.
- Parents of children aged 12 -15, who are not eligible for TFC unless the child is disabled.
Parents eligible for Universal Credit (UC) or tax credits need to be particularly careful when considering childcare vouchers and TFC as:
- Parents can’t use TFC if they claim UC or tax credits.
- Parents can claim childcare vouchers and UC or tax credits at the same time, but the value of any vouchers received will reduce the amount of UC or tax credit award.
Some parents may be better off claiming TFC or childcare vouchers instead of tax credits or Universal Credit, but the situation is complicated. The Low Incomes Tax Reform Group (LITRG) website contains more information on the interaction of tax credits / UC with TFC and with childcare vouchers.
From an employer’s perspective:
- Childcare vouchers provided under a salary sacrifice arrangement provide a secondary class 1 NIC saving of 13.8% of the salary surrendered.
- TFC provides no NIC savings.
- Childcare voucher schemes have to be run by the employer and therefore have associated costs which TFC does not.
Childcare vouchers and TFC are not the only options. Employers can provide a nursery or crèche in the workplace as a tax and NIC-free benefit, provided the qualifying conditions are met. However, the cost and practicalities of running a nursery are likely to be prohibitive for most employers.
There are other practical ways employers can help parents such as flexible working, which may be very much appreciated, cost little and have no tax implications.
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About Emma Rawson
Emma a technical officer with the Association of Tax Technicians (ATT). Her background is in corporation tax and she also has a focus on VAT.
She trained with Deloitte, working in both their London and Leeds offices, and also spent a short time working in a specialist consultancy firm providing advice to other practitioners before joining the ATT as a technical officer in 2017.