Childcare vouchers and the new tax free childcare

Childcare vouchers were introduced some time ago to help working parents pay for childcare.

So what are childcare vouchers?

Childcare vouchers are tax free employee benefits that usually work through ‘salary sacrifice’ by exchanging part of gross salary to pay for registered childcare before Tax and NIC are deducted, hence, swapping taxable pay for a tax-free benefit. The amount of salary that can be sacrificed depends on the level of the parent’s income but in doing so some parents can save in excess of £900 per annum, or over £1,800 per year if both parents receive them.

What’s in it for the employer?

It’s not just the parents that save money. Employers can also benefit by offering childcare vouchers to their employees. When an employee swaps some of their taxable salary for childcare vouchers the employer pays less Employer National Insurance Contributions (NIC), and this saving can be as much as £400 per year per employee that receives such vouchers.

Of course, if the employer does not want to deal with the administration of the vouchers themselves then there will be some costs in using an approved scheme to administer the vouchers but generally the costs are smaller than the NIC savings so the employer is still in a win-win position. As well as saving some costs they also have happier employees who are making savings on their childcare costs.

However, the Government have announced that they are launching a new Tax Free childcare scheme from early 2017 to be fully launched by April 2018.

So, will childcare vouchers now be phased out?

Current information tells us that childcare vouchers will continue to operate after April 2018 for existing scheme holders providing the employer continues to offer them. Working parents that want to join a childcare voucher scheme may do so up to April 2018, if such a scheme is offered by their employer or set up by them before this date.

How will the new Tax Free Childcare work?

The new scheme being introduced from April 2017 will mean that working parents will set up an account online and put money into it to pay for their registered childcare costs. For each £8 that is put in to the account the Government will top it up with £2 up to a maximum of £2,000 per child per year (£4,000 for a disabled child). Working parents will need to earn at least £115 per week but not more than £100,000 per year to be eligible.

If you’re an employer looking to set up a childcare voucher scheme before April 2018 or an employee trying to decide whether to continue receiving childcare vouchers after April 2017 or to switch to the new Tax Free Childcare when eligible and would like some assistance then please get in touch with us here at Westbury.