Tax-free childcare: a better option for employers?

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To most observers, the 2014 Budget announcement contained only one employee benefit topic of note – the freedom of access to pension savings. Yet the retirement-savings announcements actually prevented another major initiative, tax-free childcare (which had been trailed only the previous day) from getting much attention. Which is a shame given that the government response to the Delivering Tax-Free Childcare consultation remains a really important topic for organisations of all sizes, and is due to take effect in a little more than a year from now.

So what was suggested in this response, and what does it mean for employers and, of course, their employees? 

Here is my potted summary of the key facets of the new tax-free childcare (TFC) proposals:

  • TFC is targeted to start in autumn 2015.
  • Tax relief on childcare costs will be restricted to basic rate relief (i.e. 20% of childcare costs).
  • The relief is to a maximum of £2,000 per child, per year (a significant increase from the original proposal of £1,200 per child, per year).
  • Children up to the age of 12 will be eligible ‘within the first year’ of the scheme’s commencement. 
  • Single parent families where the parent works, and two parent families where both parents work, will be able to access TFC as long as neither parent is an additional rate taxpayer.
  • There is a minimum earnings requirement also. Parents will have to work at least 8 hours on the National Minimum Wage (or above) to qualify.
  • Parents will have a single point of contact for registering and accessing their TFC funds. The provider for all TFC will be National Savings & Investments (NS&I) – there will be no other choice of provider. There will not be any fees taken from the NS&I accounts.
  • Parents, family members, and even employers will be able to contribute to these online accounts. It’s not at all clear what tax implications there would be for each party if the employer were to contribute direct, and at present I am struggling to see any advantage in doing so (other than a cosmetic ‘family-friendly’ box-ticking exercise for the government and employers). The government will add their 20% contribution top up directly to the accounts.
  • Money can be built up over time, and used to fund childcare costs when it is most useful/ convenient for the parents to do so. 
  • Should the money not be needed for childcare, the parents will be able to extract the funds (less the government top ups) to use as they wish.
  • The consultation provides some outline solutions to some of the other issues that plagued the early thinking – such as those parents moving in and out of employment, fluctuating earners, or those that are temporarily absent. 

The bottom line here is that these proposals are well thought through and indeed a significant improvement on the initial government thinking outlined in 2013. The aim is to increase access to government childcare support in the first year from currently less than 500,000 families to close to 2 million.

So, plenty of good news there for working parents. But what does this mean to employers and employees who currently utilise the existing childcare voucher system?

The impact on working parents

It remains the case that the new proposals are not always going to be the best option for parents.

In my simple view there are three groupings of parents who may be significantly disadvantaged by the new TFC proposals when compared to the existing childcare vouchers system:

  1. It is clear that the TFC proposals will not be extended to family units with two parents and only one earner. Whilst such families are very much in the minority today, they still represent a significant percentage of the working population (and presumably an even bigger percentage of those family units with young children) so this is far from a moot point.
  2. The new proposals currently only extend to children under age 12, whereas the existing childcare voucher scheme continues until nearly age 16.
  3. Whilst the new proposals are potentially more financially beneficial to a family, it does not follow that this is always the case. The principal differences here are the levels of tax relief provided, the cap on government support, and the amount actually spent on childcare in any given year.

For example, it will generally be the case that a single parent family *(where the parent is a basic rate taxpayer) would be better off in an existing childcare vouchers scheme until such time as monthly childcare costs exceed £389. Likewise, a two-parent family* (again both basic rate taxpayers) would be better off in the existing schemes until their childcare costs exceed £778 per month.

And with the average cost of childcare for an under-two standing at £4.26 per hour**, that equates to quite sizeable amounts of childcare provision in each case. So it’s clear that some employees will remain better off under the existing childcare vouchers system.

* where all parents have access to childcare vouchers
** Family and Childcare Trust briefing to the House of Lords, 9 January 2014

The impact on employers

The consultation response includes the following paragraph:

‘When tax-free childcare is introduced, employer-supported childcare (childcare vouchers and directly-contracted childcare) will be closed to new entrants. Parents who are already receiving support through that scheme will be able to continue receiving support – in exactly the same way – for as long as they continue to work for their current employer, and the employer continues to offer the scheme.’

So employers can, if they wish, continue to offer childcare vouchers post-autumn 2015 to existing members of the scheme.

Given that many parents cite the cost of childcare as one of the biggest barriers in their return to work, and that recent surveys have sometimes found that childcare costs are higher than even a monthly mortgage payment, this is not a decision that should be rushed into by employers for the sake of administrative simplicity. 

After all, the loss of government support between the old and new systems could make the difference between a key employee being able to continue to work or not. It therefore remains the case that many employers should be somewhat cautious how they react to the new system, and perhaps should assess their current users of the system before shelving an existing childcare voucher scheme in favour of TFC.

My next point for employers is one that may be easily missed. The existing system of childcare vouchers carries an inherent National Insurance saving to the employer for every employee who saves via the vouchers. For some employers with high usage this could amount to a sizable saving (which is often used to fund other items). It’s therefore worth assessing what impact the withdrawal of such a scheme may have on the wider finances of the organisation. See also ‘Keeping salary sacrifice arrangements effective’.

Finally, and not least, it’s worth highlighting that employers who continues to offer existing savers the childcare voucher route after 2015 may well benefit from improved staff retention for that demographic. After all, an employee who changes employment after that date will no longer be able to claim childcare vouchers, and will therefore only be able to claim government support for childcare if they satisfy the new TFC criteria. It might therefore be a shrewd retention move for employers actively to promote childcare vouchers membership between now and autumn 2015.


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