Childcare vouchers vs Tax-free Childcare – which one is best for your employees?

Childcare vouchers in the workplace is a scheme that has been in place since 1989, but in April 2018 it will be joined by a new scheme called “Tax-free Childcare”. If employees are in the current scheme when this change takes place then this will continue to exist for as long as their company offers it. However, if you are a company trying to decipher the changes read on.  

What are childcare vouchers and what are the benefits?

Childcare vouchers are a great scheme that was set up by the government and can potentially save employees up to £933 a year. It is a scheme that needs to be enacted by employers but don’t be put off as thousands of small and large businesses across the UK have the scheme in operation. Employer sponsored childcare voucher schemes use The “salary sacrifice” mechanism which means that you the employer takes, for example, the maximum monthly amount of £243 (per parent) from your employee’s salary and then issues them with £243 worth of vouchers that can be used for childcare via an online account. They will therefore not have to pay tax and National Insurance contributions on the £243 which means that the net cost of vouchers would have only been worth around £165. So essentially the employee benefits by saving £77 each month if they are a basic rate taxpayer. The saving is not so great for higher rate taxpayers, but still worth having.  

The scheme is great for companies to offer for two very straightforward reasons. First off, it shows a great deal of care and thoughtfulness towards your employees by offering a scheme that helps with childcare costs and increases the amount they actually earn without you needing to pay them anymore. Secondly, it can actually save your business money because the scheme is low cost to implement, but it also means you don’t pay National Insurance on the portion of the tax that employees use towards the vouchers. This could mean a saving of around £400 per employee per year.

What is tax-free childcare and what are the benefits?

The new scheme is due to be rolled out gradually from the end of April 2018. Employees will be able to use this scheme to pay for up to £10,000 worth of childcare per child each year. Under the scheme, the government will give an extra 20% towards childcare costs up to the aforementioned limit of £10,000. So per child per year, families could save up to £2,000.

This scheme, we understand, will be run by NS&I and does not require employers involvement to implement. Some employees will win under the new scheme and some should not leave their employer sponsored scheme. For example, a family with multiple children and where each parent is earning less than £100,000 may benefit far more from the new scheme and be able to get much more than the £933 saving under childcare vouchers. However, child care costs tend to decrease with age and so families with children with lower child care may be better staying with childcare vouchers. For example, where both parents work and they are either basic rate taxpayers with annual total childcare costs of £9,330 or less, or higher rate taxpayers with annual total childcare costs of £6,232 or fewer childcare vouchers would seem to be a better option. Also, both parents must work to claim tax-free childcare.

Depending on the specific circumstances for each employee, either scheme may be much more beneficial than the other. It’s imperative employers and employees do not make snap decisions.  We would suggest looking at the government website below for more help.

If you are deciding on whether or not to implement the current childcare voucher scheme before it expires in April 2018, why wouldn’t you? Giving employees choice for as long as possible is the message here. Bear in mind if an employee is not in an employer sponsored scheme before April 2018 he or she will not be able to join or re-join. Employees will greatly appreciate any help understanding the differences in these two schemes. We will be covering this topic more in our childcare and family workshops. Please contact us for more information about this.

Further useful resources:

http://www.tax-free-childcare.info/resources/childcare-vouchers-vs-tax-free-childcare/