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Vouchers versus a tax-free structure

Many employees balance their work with supporting children. Sonia Rach looks at the advent of tax-free childcare and what employers need to consider when choosing a childcare option

11 April 2017
Sonia Rach

A year from now, no new entrants will be able to join the childcare voucher schemes. And while, with the introduction of tax-free childcare, this won’t be a problem for many, some families that are eligible for childcare vouchers but not the new tax-free scheme will miss out quite substantially.

 

Chancellor Philip Hammond announced in the Autumn Statement that the rollout of tax-free childcare (TFC) would begin in April 2017 on a phased basis, running in parallel with the existing childcare voucher scheme arrangement (CVSA).

 

Under the current scheme, parents receive a contribution to the cost of childcare equivalent to 15 free hours a week. From September 2017, this will change to 30 hours for working parents. Eligible families will have approximately 20% of their annual childcare costs paid for by the government.

 

Julian Foster, managing director at Computershare says: “Under TFC, the government will ‘top up’ childcare payments up to a maximum level – namely that they will pay in 20p for every 80p paid in (up to a maximum of £2,000 per child).

 

“However, parents can still join their employer’s childcare voucher scheme until April 2018 and, although it will then close to new entrants, parents already taking childcare vouchers can remain in for as long as they are eligible.”

 

But who’s eligible? It will be open to parents who work at least 16 hours a week, earn less than £100,000 a year and who pay for Ofsted-approved childcare for a child under 12. Unlike childcare vouchers that only apply to those whose employers offer it, this scheme will be available to all qualifying parents.

 

Picking the right one

 

Despite TFC working well for the majority of parents, there are still some who can’t benefit so much from it. Thus the question remains, are employees better off with childcare vouchers or tax-free childcare?

 

TFC allows people to move away from relying on their employers to help with their childcare. It also can’t be used for children older than 12 (unless they are registered disabled), whereas childcare vouchers can be used for children up to 15 years old.

 

Marena Mieras, senior associate at Mercer Health, says: “The CVSA is the employer-sponsored arrangement, and while the introduction of TFC removes this link between sponsored childcare and the employee, the downside is that the employer National Insurance savings that may be enjoyed as a result of the CVSA they have, will diminish.”

 

Foster agrees, as he explains the benefits of the voucher scheme. “Childcare vouchers will not be affected by recent salary sacrifice and benefit-in-kind changes that were announced in the Autumn Statement, so both employers and employees can continue to retain any tax and National Insurance benefits.

 

“It’s also worth bearing in mind that parents can’t switch between schemes. Once a parent joins TFC, they have three months to notify their employer to cease their payroll deductions for childcare vouchers. Once they leave the voucher scheme they can’t re-join it later.”

 

When tax-free childcare was first announced, Sodexo released a study that demonstrated the savings that parents make on a voucher scheme. It found that the existing scheme helps around 400,000 working parents save nearly £1,000 of tax and National Insurance annually on their childcare costs – something that could reach £1,866 per family if both parents are able to claim vouchers through their workplace.

 

Nonetheless, the government predicts up to 600,000 families will be able to take advantage of the extra childcare allowances – worth around £5,000 per year.

 

When deciding which scheme is best, employers also need to consider employees’ personal circumstances. Mieras advises: “As before, while a voucher scheme may suit some of the workforce, TFC will suit some others better, so employers should consider allowing employees access to both.

 

“When considering a voucher scheme, employers should consider the ease of administration, on-boarding and carer management process for employees, communication support, online capability, other discounts that may be available and finally, the administration charge applied by the provider, as this is typically paid by the employer.”

 

Other approaches

 

In addition to CVSA and TFC, there are other childcare options that can be offered to employees such as on-site nurseries, flexible working and emergency childcare provision.

 

Ben Black, director at My Family Care, believes that organisations need to move beyond childcare voucher schemes.

 

“The main consideration is that childcare vouchers are ending, and if you want to be an organisation where you’re family friendly then you’re not going to be able to hide behind a voucher scheme.

 

“Businesses will say they are family friendly because they have a childcare scheme but they need to do more than just think in terms of vouchers: it’s about flexible working, emergency childcare, helplines, webinars – things that companies can do to help.”

 

Employers can take advantage of government initiatives that are already in place such as schemes aimed at getting mothers back into the workplace, including the increase of free childcare from 15 to 30 hours in England.

 

Black adds: “There are four key things to consider. It begins with thinking about those with young children who still have a career to consider. It’s the help an organisation provides with the maternity/ paternity transition, such as offering one-to-one maternity coaching.”

 

Yet Computershare’s Foster still believes organisations should still put childcare vouchers in place. He argues that employers can also develop their flexible working practices, and some may even find the creation of a workplace nursery helpful.

 

“However, the most urgent and easy step employers can take is to offer a childcare voucher scheme now: once it is registered, parents can choose to continue to take vouchers for as long as they need.

 

“If their childcare arrangements change, they can still convert to tax-free childcare at a later date – if that ends up being the better scheme for them.”

 

Childcare is becoming a benefit that is becoming more of a need for employees than a want, especially to manage financially. More and more organisations are also expanding their parental leave policies to accommodate the needs of their workforce.

 

The area that organisations need to focus on and consider is their communication method, as this needs to be designed to allow employees to make an informed choice about the best childcare arrangement for them.

 

With a more helpful culture, staff can feel at ease when discussing their needs with managers, and employers will be able to support them in the best way possible.

 

Understanding and supporting employees who are in working families is key to a contented workforce. 


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