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Changes to the tax treatment of childcare costs: what you need to know

Changes to the tax treatment of childcare costs: what you need to know

*Please note the information in this article may be out of date

This article is based on 2014 figures and not the 2015 figures. See our 2014/15 Budget changes for the new childcare figures. 

For a great many parents, the coming changes to the Childcare Voucher scheme, will leave them out of pocket. Analysing which Voucher scheme will be more beneficial for you, is essential for working parents. The new Tax- free Childcare scheme will replace the existing Childcare Voucher scheme from Autumn 2015. Parents already in receipt of vouchers can choose to stay on the old system, or move to the new one. We examine both to help you decide which is better for you. It's worth noting that specifics about the new scheme may change before its introduction in 2015.

Existing Vouchers vs. New Scheme

Childcare Vouchers are a tax and National Insurance (NI) exempt employee benefit that are usually offered via salary sacrifice which means you sacrifice part of your salary and save tax and NI. Under the present Voucher scheme, how much of a saving depends on the rate of tax paid by the parent. Vouchers can save each working parent up to £933 per year in tax and NI. Employers can save up to £402, per employee, in employers NI per year. As both parents can claim Vouchers under the present system, annual savings of up to £1,866 can be made in a household with two working parents. See our handy infographic below to show what savings your family can make using Childcare Vouchers.

Under the new Childcare Scheme, to be introduced in 2015, the government will be subsidising 20% towards a child’s registered childcare costs. The remaining 80% will be paid by parents. So, for every £100 paid for childcare, parents pay £80 and the government pay £20. This 20% saving can be made on the first £6,000 of childcare costs, giving parents a saving of £1,200 per child, per year.

The changes, announced during the March 20th 2013 budget statement, have caused much debate. In order for a couple to qualify for the new fax-free Childcare scheme, both parents  must be working and paying tax. This is not the case under the present system, where one parent can claim Childcare Vouchers even if the other is not earning. There is no change for single parent households.

Also, under the new tax-free Childcare scheme, parents can initially only claim vouchers for a child up to 5 years of age instead of 16 years of age, as it is under the present Voucher scheme. Eventually it will apply to childcare for under 12s. One clear advantage of the new tax-free Childcare scheme is that it is not run through employers, meaning it will be open to more parents, including those who are Self-employed. Under the new Scheme, parents do not have to rely on employers to offer the service.  They will be able to choose a Childcare Voucher provider to manage their entitlement and childcare costs. Voucher providers such as Edenred, founding member of the Childcare Voucher Provider Association (CVPA) and one of our site sponsors, will collect payments from the government on your behalf, and use them to pay for the registered childcare provider of your choice.

Information for Parents
Information for Self Employed
Information for Employers

Employers: Advantages of offering Childcare Vouchers

At the moment, Childcare Vouchers are accessed through ones employers, limiting their availability to those parents who work where there is a Voucher scheme provided. There are many reasons why Employers, large or small, should offer Childcare Vouchers to their Employees:

  • All the above, and the Employer saves money - they don't pay National Insurance on Childcare Vouchers, meaning a saving of up to £402 in Employers NI for every parent that signs up to the scheme. The costs of offering a voucher scheme to its employees is generally less than the NI savings an employer makes, so there is also a financial gain for the employer.
  • Offering working parents a way to lessen their childcare costs helps employers attract and hold on to valued employees.
  • Providing vouchers conveys the image of a caring employer.
  • Childcare Vouchers can form part of an attractive employee benefit package.
  • Having a Childcare Voucher scheme in place can help reduce absenteeism and increase the number of parents returning to work after having a child.
  • A good provider will also include extra benefits with your scheme.  Edenred, amongst other things, provide free information and advice on family matters.

It should be noted that Employers will not receive any NI savings for employees who avail of vouchers under the new scheme in 2015. Taking advantage of the Employers NI savings made on employees who sign up to the present scheme, while they are still available, would be prudent. Any employee who continues to access vouchers under the existing scheme after Autumn 2015 will still afford their employer the NI savings. Contact Edenred today about offering Childcare Vouchers to your employees.

Self Employed

If you are self-employed, accessing Childcare Vouchers under the present Voucher scheme is only an option if you have your business set up as a Limited Company (another consideration in the Limited Company v Sole Trader argument).  In this case, you can access vouchers as any working parent can. For more information, contacting an experienced voucher provider like Edenred would be advisable. Sole Traders/ Partnerships can not avail of the present Voucher scheme.

The new Childcare Voucher Scheme however, will be available to all self-employed. Come Autumn 2015, Self Employed parents will be able to avail of Childcare Vouchers through voucher providers.

Parents - Don't Miss Out

The existing Childcare Voucher scheme will still be in existence until late 2015. This means that parents (or parents to be) who are not at present using the voucher scheme to help pay for childcare costs have time to sign up. In some cases, as we have highlighted in the table below, the present system will be more beneficial than the new scheme. Under the new scheme, families with two working parents and one child in childcare, will be worse off than those using Childcare Vouchers, by up to £666 a year.

What many people do not realise is that the existing vouchers are not specific to any child. Childcare Vouchers from a provider, such as Edenred, have no expiration date, making it possible to stock up on them for the future.

Once the new scheme is introduced, parents already in receipt of Childcare Vouchers have the option to stay on the current scheme for 5 more years, or move to the new scheme. New parents applying for the tax-free Childcare Scheme at that point will not have the option of the current Childcare Voucher scheme.

If your employer does not offer a Childcare Voucher scheme, putting them in touch with a voucher provider, such as Edenred, will save both you, and your employer, money in tax and NI contributions. 

Edenred can provide you with any further advice you need to help you stay ahead of the Government 2015 changes. Act now to maximise your savings and put the best possible scheme in place before the changes take effect.  You can call Edenred on 0843 453 4406 , send an email to sales@edenred.co.uk or visit www.edenred.co.uk.

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