Are you up to speed with the changes to childcare vouchers due in April 2018, for example that such schemes will close to new joiners? Will the alternative (Tax-Free Childcare) make a dent in your reward policy and your finances?
Background
Since 2005, many employers have embraced the attractiveness of childcare vouchers, allowing both employer and employee to save money. It’s spawned a whole benefits industry that has encouraged payroll professionals to exploit other tax-efficient benefits in kind by offering them via salary sacrifice. However, the loss of NI contributions is now unsustainable for the Treasury, hence the move to stop employers offering childcare vouchers plus the other changes to salary sacrifice that came into force in April 2017.
What’s the alternative?
Since April 2017, the government has been rolling out the joint online childcare account (JOCA). The principle is that eligible parents deposit money in their digital account on a quarterly basis based on an estimate of their childcare costs for each child. This figure is topped up by 20% tax relief from the government. Funds are then paid out of the account to registered nannies, nurseries and childminders. Each quarter unused funds can roll forward and parents reconfirm their eligibility.
Pro advice. Some parents will be better off staying with childcare vouchers, particularly if they have children aged 12 to 15 or are 40% taxpayers and have been receiving vouchers pre-April 2011. Encourage them to check their situation before leaving vouchers as there’s no going back after 6 April 2018.
How does it work?
The theory is that eligible working parents throughout the UK with a child born on, or after, 24 November 2011, can open an account for each child up to 14 days before starting work. They will be able to deposit up to £8,000 of childcare costs per child (£16,000 if the child is disabled) into their JOCA which will qualify for the 20% tax relief. Employers and other family members such as grandparents can also deposit monies into the account. There is flexibility to pay more into the account in some months and less at other times. This means parents can build up a balance to use at times when they need more childcare than usual, for example over the school holidays.
It will also be possible in some circumstances to withdraw monies from the account, but of course, the government will also withdraw the corresponding tax relief! It’s estimated that Tax-Free Childcare will be available to more than twice as many parents as the employer-supported childcare.
Sign up by 5 April 2018 or lose out
Any employees who are members of voucher schemes by 5 April 2018 can remain in vouchers. To take Tax-Free Childcare they must:
– have a child aged under 12 or a disabled child under the age of 17
– have minimum income that equates to 16 hours at the national minimum wage appropriate to their age
– have maximum income (or their partner’s income) that does not exceed £100,000
– be resident in the UK at the time that the declaration of eligibility is made
– not be receiving child support via either working tax credit or Universal Credit; and
– not be participating in a childcare voucher scheme.
Pro advice 1. As employers also benefit by saving 13.8% NI on the salary given up in exchange for vouchers it’s worth publicising the benefits of staying in vouchers one last time. Also, any salary given up by those receiving childcare vouchers saves you another 0.5% if you pay the apprenticeship levy as Niable pay on which the levy is based has been reduced.
Pro advice 2. Make sure your HR staff and line managers understand that leavers will lose voucher eligibility if they move on, and new starters can’t be offered vouchers if they join you on or after 6 April 2018.
Pro advice 3. High earners can get themselves within eligibility for Tax-Free Childcare by taking up another salary sacrifice – perhaps for enhanced employer pension contributions that reduce their pay to £100,000 or less.
Digital woes – an opportunity
As with many government digital initiatives, the JOCA has had a very wobbly start, with parents finding that their funds are locked in their account and can’t be directed to their childcare provider, or they aren’t allowed to renew as suddenly they are classed as ineligible even though their circumstance haven’t changed.
The government has even had to introduce a compensation scheme.
Confusing messages
Parents are warned when they sign up to Tax-Free Childcare with their JOCA that they must tell you in writing within three months that they can no longer receive vouchers. There’s no prescribed form, so an e-mail will suffice.
However, parents have also been told that if they sign up for 30 hours’ free childcare they must stop receiving vouchers – this isn’t true even though this support is also offered via the JOCA.
End salary sacrifice
It’s only parents who sign up for Tax-Free Childcare and will receive cash from the government who can’t remain in vouchers. When you receive notice to end vouchers you must bring the salary sacrifice to an end, reissue the contract and amend their salary.
It doesn’t matter if the sacrifice has not been in place for twelve months; the provision of a childcare account notice (the official name for notice to quit vouchers) will be classed as a lifestyle event which allows the premature ending of the sacrifice.
Pro advice. Make sure you give out the right message: if you move to Tax-Free Childcare from 6 April 2018 you can’t move back to vouchers.
Saving that service charge
There’s no doubt that childcare voucher providers are going to see their business model fall away from April 2018. So they will no doubt start to look at how much they are charging their remaining childcare voucher clients. As your voucher population starts to dwindle, as employees leave or move to Tax-Free Childcare, consider if you need to use a third party at all.
Lots of employers offer self-administered vouchers. They simply provide a voucher to employees with their payslips and they pass this on to their childcare provider who sends it in to the employer’s finance team to be redeemed. It’s certainly worth thinking about when you only have a handful of employees with vouchers.
Pro advice. If you currently fund places for employees at a workplace nursery, the good news is that the tax exemption for such funding remains and is unlimited.
Basic earnings assessment
Whilst your childcare voucher population won’t be growing, you still have responsibilities in respect of those who remain in vouchers and joined your scheme on, or after, 6 April 2011. They are entitled to varying levels of tax relief depending on their estimated marginal rate of tax for the tax year ahead. This is called the basic earnings assessment.
Many payroll software providers have a tool or template to help you work out the correct level of earnings and therefore the correct level of tax relief. SD Worx kindly publish theirs to be used by any employer, see Follow up.
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