In 2013, the Government announced in the Budget that a new tax-free childcare voucher scheme would be introduced in 2015. The change that will come in from autumn ‘15 will see the Government provide working families with 20% of their childcare costs, up to £2,000 for each child per year. This is equivalent to basic rate tax relief on childcare costs up to £10,000 a year (which was originally capped at only £6,000 but has since been increased). The new scheme will initially only be available in respect of children under 5 although there are plans to increase the age to 12 within a year.
The new scheme will take the form of an online account into which individuals will deposit and tax relief will be added to the account by the Government. In turn, the account will be used to pay childcare suppliers. From a payroll and employer perspective, and as compared to childcare voucher schemes, this new approach entirely removes the employers involvement in such matters.
Employers will still be able to continue to set up a childcare voucher scheme until tax-free childcare is launched, meaning there is still an opportunity for them to benefit from the National Insurance savings that childcare vouchers provide. Parents will still be able to sign up for existing childcare vouchers until August 2015 and then continue to order vouchers for as long as their employer continues to run the scheme. Some parents may decide to switch to the new scheme as in some cases, this will provide higher savings.
Some key points:
- Tax-free childcare will provide higher savings for many parents, including the self-employed and those with high childcare costs. However, some parents are better off under the existing arrangements.
- Parents who sign up to the current childcare voucher scheme will be able to remain in the scheme, so they will not be disadvantaged by the proposed 2015 changes. However, if they move to a new employer after autumn 2015, they will be considered to have left the current scheme and be forced to switch to the new arrangements.
- Some parents will not be ready to use childcare vouchers until after the new scheme starts. In some cases, these parents will receive lower savings from the new arrangements than they would have had under the current scheme.
- The new scheme will not be available to families where either parent earns over £150,000, whereas the current scheme allows high earners to enjoy tax savings at the same level as basic-rate taxpayers.
- The new arrangement will not provide any National Insurance savings (currently worth up to 12% for basic-rate taxpayers and up to 13.8% for employers). For some employers, this will be a significant loss, which could have a knock-on effect on the amount which they are able to spend on other employee benefits.
- The design of the new scheme is very different from existing childcare vouchers already in place. There will be no formal role for employers; parents will solely be responsible for setting up and managing their accounts themselves. However, The Government expects employers to remain a source of information for their staff regarding the new tax-free childcare scheme.
- Employers should ensure they are signed up to the existing childcare voucher scheme because not everyone will benefit from tax-free childcare that is coming into effect from autumn. Parents can then decide which scheme works best for them