The way in which the government is supporting parent funded childcare is changing, but there is a limited window left in which employees may be able to sign up to the ‘old scheme’ if their employer offers it.
The ‘old scheme’ is child care vouchers, it is being replaced with a potentially more flexible system that is open to more people.
For many employees, particularly those who are basic rate taxpayers, a child care voucher scheme run through a salary sacrifice arrangement can offer them better value than the new scheme. However, this is not a simple decision. It has an impact upon benefits and you can’t be a member of both schemes.
The tax position
To help illustrate the tax difference, let us assume you are a basic rate taxpayer with £1,000 gross salary you are planning on spending on childcare over the course of the year and deciding whether to go into the employer’s voucher scheme or the new savings account.
Salary Sacrifice: Child Care Vouchers
Give up £1,000 gross salary, you get £1,000 of childcare vouchers to spend on approved childcare (typically a registered child care provider).
New Child Care Savings Account
Your employer doesn’t get involved in the scheme. Instead, they pay you the £1,000 through payroll, which means you suffer PAYE at 20% of £200 and Employee’s NIC of £120 leaving you with £680 to put into the Government’s new scheme to spend on approved childcare (typically a registered child care provider).
Under the new scheme, you create a new account Take your £680 of net salary and put it into the Government’s new savings scheme. Typically, for every 80p you put in, they will add 20p taking you from £680 to £850.
For the Employer
The employer can save employer’s national insurance on the payments under the childcare voucher scheme, but not under the government’s new scheme.
So, the child care vouchers save me more right? Well, maybe.
There is potentially a higher cap on the child care savings account than on the child care vouchers and higher earners won’t enjoy as much of a saving from vouchers as the cap is lower for them and they pay national insurance at a lower rate. Childcare vouchers are only available to employees whose employer’s offer the scheme (and practically there is unlikely to be time to set up a new scheme at this stage!) and is not available to the self employed.
Both childcare vouchers and the childcare account can have an impact on benefits and you can’t salary sacrifice below minimum wage.
Confused? That’s not surprising. Helpfully, the Government have produced a calculator to help employees decide on their own circumstances:
So how long do employees have to decide?
Here’s the bad news, the timescale is now measured in days rather than months. Anyone not registered and in receipt of childcare vouchers on or before 5 April 2018 will lose the opportunity to join in the future. For some this may be too late, for others you may only have a few days before the March payroll cut off.
But I don’t need childcare right now
If someone is in the childcare voucher scheme on or before 5 April 2018 then they can make use of the scheme indefinitely. So even if they only sacrifice the barest minimum (sometimes as little as £1 a month) they can receive child care vouchers now, then when their needs change in later years they could chose to vary their child care voucher contributions all the way up to the maximum (currently £243 per month) and benefit from the relief in full.
The vouchers don’t have to be used immediately – they can be saved up and used to pay for childcare much later. For example, even if there is no immediate need, they could for example be saved and used to fund a summer holiday camp in a year’s time.
This might prove useful in a variety of circumstances. For example, if one parent is currently staying home to look after children but plans on returning to work in another year or two, there is an opportunity for the parent currently in employment to get their foot in the door of the voucher scheme for later. Most providers allow changes to be made on an annual basis or on a ‘lifestyle event’ (e.g. birth of another child). So employees whilst you couldn’t join it in future, there would be nothing to stop the employee coming out of the scheme after a year if the account works better for them.