Long-heralded changes to tax relief for childcare costs are looming on the horizon. We are often asked if this is a good thing, and as ever the answer is “it depends”!
Where Are We Now?
At present, the only forms of government assistance with childcare costs are via Childcare Vouchers and the Child Tax Credit system. For the purposes of this article, we are looking solely at Childcare Vouchers.
Currently, employers can agree to provide up to £243 per month of Childcare Vouchers for an employee (£124 for higher rate employees) without HMRC seeking Income Tax or National Insurance from either the employer or the employee.
Most often, the employee agrees to sacrifice £243 per month from their earnings, with the employer paying an equivalent amount to their Childcare provider. It is also worth remembering that both parents can claim for the same child, doubling the savings on offer.
The savings vary, but can be as high as £933 for the employee (tax and NIC savings) and £402 for the employer in NIC savings. The cost of the scheme varies but around 5% of the voucher amount is normal.
So What’s Changing?
Childcare vouchers are only available to employees, and access is limited for those on or around minimum wage. There is no equivalent scheme for the self-employed.
The government has announced that from April 2017, there will be a new scheme called “Tax-Free Childcare” which will be available to parents, employed and self-employed. This scheme will see the parent paying 80% of their childcare costs with the government providing the additional 20% (up to a maximum of £2,000 per child per year).
So What’s The Problem?
There are several, and as ever they are well tucked away in the rules.
Firstly, the new “Tax Free Childcare” is not an employment offering so any employees taking up this option will not save your business any employer NIC.
Secondly, the new “Tax Free Childcare” is only going to be available where either both parents work, or there is a single parent who works (at least 16 hours per week). Should one parent lose their job, the entitlement for both parents will cease immediately.
Thirdly, the new scheme will only provide assistance equivalent to basic rate tax (20%). The current voucher scheme also provides relief from National Insurance for the employee (12%) and the employer (13.8%).
Also the age limit for the child reduces from the current 15 years of age to 12 years of age; so no more help with after-school club costs.
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John and Tracey both work for the same employer, are basic rate taxpayers, and have a son in full-time childcare at a cost of £600 per month. Currently they pay for their childcare out of their after-tax income.
If they opted for the Childcare Voucher scheme, both would agree to sacrifice £243 per month of their salary in exchange for vouchers. The annual savings would be:
- John and Tracey would save £1,866 (£243 x 12mths x 32%), and
- The employer would save £516 after allowing for administration costs.
If instead they opted for the new Tax-Free Childcare option:
- John and Tracey would save £1,440 from the government paying one-fifth of their childcare;
- Their employer would save nothing.
This represents a total loss of relief under the new scheme of £942 every year.
What Can I Do?
Well if you are an employer, you may want to start talking to your employees about their childcare costs now to head off the changes.
This will ensure that you will be able to assist your employees with their childcare costs, whilst saving on Employer NIC too. This is a great way to increase staff satisfaction and retention rates, without costing money.
The current childcare voucher scheme will remain open to new entrants until 31 March 2018, after which no new applications will be accepted. Those in the scheme at this point will be allowed to continue with the scheme until they decide to leave.
Coburn McKenna have experience in dealing with Childcare Voucher schemes for employers, from staff presentations through to final implementation alongside your chosen voucher provider. For more information on how we can help, contact Mark McKenna or Clair Coburn today on 0151 489 1010.