Employee childcare voucher schemes – how do they work and are you aware of the latest update on Tax-Free Childcare

27th April 2017 | Written by Amy White

Over recent months we’ve had quite a few enquiries about childcare vouchers, how they work, what the benefits are of providing them and also how the scheme is going to be changing in the near future.

As matters stand, employers do not have to provide childcare vouchers. They are an employment benefit some employers offer, just like private healthcare or gym membership, for example.

If an employer decides they do want to start providing childcare vouchers to their staff, they need to sign up with a provider. There are loads to choose from and each offers a slightly different package.

Childcare voucher schemes work by way of salary sacrifice. The employee sacrifices some of their salary at source in exchange for receiving childcare vouchers. This has tax and National Insurance savings for the employee and National Insurance savings for the employer.

If an employer signs up to a voucher scheme and one of their employees decides they want to join it, they are required to consent to the salary sacrifice element and to confirm, with their chosen childcare provider, that they are actually signed up to the voucher scheme. If the provider is signed up, the scheme provides the vouchers and the employer deducts the relevant amount from the employee’s salary at source. The scheme provider then invoices the employer directly for the relevant amount.

Once a scheme is up and running, because the employee liaises directly with the scheme provider to give details of the childcare provider and the amount of childcare being provided, employers don’t actually have to be terribly involved and don’t incur a great deal of extra work in connection with the running of the scheme.

That said, voucher schemes are not without their complexity and there has recently been a lot of debate around whether they should continue during maternity leave or not. During ordinary and additional maternity leave, an employee is entitled to the benefit of all her terms and conditions of employment, except her remuneration. The question is, therefore, whether childcare vouchers are ‘remuneration’ or ‘non-cash benefits’.

In 2008, HMRC indicated, in its guidance, that childcare vouchers constitute non-cash benefits and that, as a consequence, they should continue throughout maternity leave. Conversely, in the case of Donaldson v Peninsula Business Services the Employment Appeal Tribunal (EAT) held that childcare vouchers are actually remuneration, meaning they do not need to be continued during maternity leave. In its conclusions the EAT stated that its finding was ‘tentative’ meaning there may well be further developments in this area before long. In addition, given that by withholding childcare vouchers during maternity leave an employer might run the risk of an indirect discrimination claim, many employers might not want to risk even going there!

On 28 April 2017 however, a new government scheme, Tax-Free Childcare, is due to launch with the intention of helping working parents with the cost of childcare. The scheme, which will be rolled out gradually (being offered to parents of children under two first), will not depend on participation by employers and will not, therefore, involve any form of salary sacrifice. Rather, eligible parents will be able to open an online account and use it to pay for childcare from a registered provider in future.

To be classified as ‘eligible’ parents will have to be in work, each expecting to earn at least £120.00 a week. Each parent must not have income over £100,000.00 per year.

In terms of the financial benefit on offer, for every £8.00 a parent pays in, the government will pay in an additional £2.00. Parents can receive up to £2,000.00 per child each year or £4,000.00 for disabled children.

Although the scheme is being rolled out gradually it will, ultimately, be available for children under the age of 12 (or under 17 for children with disabilities).

The existence of the new scheme will not mean the automatic closure of existing Employer-Supported Childcare schemes (these can remain open to new entrants until April 2018) but could well be useful for employers who are asked about this issue in future.

If you would like further information or advice please contact our Employment team – Amy White on 01825 744489, email amywhite@rixandkay.co.uk or Miranda Martin on 01273 225603, email mirandamartin@rixandkay.co.uk