As I have mentioned several times previously, I am keen to cover all employee benefits on this blog, not just pensions. Pensions have been the main lead story for the last few months (and this is likely to continue until auto-enrolment takes hold), but there are other things going on out there that employers need to be aware of.

One such story is a long-standing seminar friend of mine, Childcare Vouchers.

Background

Whilst Childcare Vouchers had been around for years, they only became viable, and arguably attractive, to most employers in the middle of the last decade when the last Government made them a centre-piece of some new childcare initiatives. In doing so, they allowed employees to sacrifice some of their salary in exchange for the same face value of childcare vouchers (which could, in theory, be used for any registered childcare issues). This exchange avoided the employee paying tax or national insurance on the value sacrificed, and the employer also avoided national insurance too.

The Government introduced this benefit to help single parents back into the workplace (working on the basis that it’s better to have someone in the system paying some level of taxation, rather than out of the system and claiming benefits). Sadly, the structure used for the benefit to work (Salary Sacrifice), and the Childcare Element of the then tax credit system, did not favour the low paid using this option. Conversly, the better paid, and particularly higher tax payers, stood to benefit rather well.

Since setting up a Childcare Vouchers scheme was, and is, a very low cost operation, many employers jumped aboard the bandwagon. Childcare Vouchers became a no-brainer decision for many. Take-up was always limited though, as by definition the employees targeted had to fit the demographics for Childcare Vouchers (employees with young children and with paid childcare issues). It is still not uncommon to find a smaller employer where there are only one or two users of Childcare Vouchers. However, for those users this is a real and tangible benefit (I speak as someone who has a sizable childcare voucher pot already!).

So what’s changed?

Well, in the immediate aftermath of the financial crisis, the then Labour government decided to pull the plug on the tax breaks inherent in Childcare Vouchers to help fund some of the deficit issues. I suspect that this seemed like an easy target, but there was a surprising, and sizable, backlash against this with a major petiton logged on the Downing Street website. As the election approached, the government moved position again, and stated that full tax-relief at the highest marginal rate would continue as long as salary was being exchanged for vouchers before April 2011.

Then the Coalition came into power, and we have yet another instruction. In order to level the playing field, and to ensure that vouchers remain attractive to the lower paid (the original target audience let us not forget), it has been announced that the amount of tax-free vouchers that an employee can take will be dictated by the taxation rate the employee pays. To illustrate this, please see below:

Current Childcare Voucher Limit = £55 per week.

From April 2011:

Basic Rate Taxpayer = £55 per week

Higher Rate Taxpayer = £28 per week

Top Rate Taxpayer = £22 per week.

In effect, and after allowing for the increase in National Insurance this year, this makes childcare vouchers more attractive to basic rate taxpayers in terms of percentage gain.

BUT (AND IMPORTANTLY)…

If an employee is already in the scheme PRIOR to April 2011, the employee can continue to benefit from the previous maximum level (up to the original £55 per week) tax free, regardless of the tax rate!

What now?

There is, obviously, a chance to communicate your scheme to employees before April so that they can benefit from this opportunity (or at least understand that there is an opportunity). This would be good practice and can only be seen as a good thing by your workforce. Also, more (or higher saving) users = more national insurance saving for the employer.

In the interests of balance though, I should point out that new joiners post 2011 are going to present a potential increased admin burden to employers. Our understanding currently is that employers will be required to assess which tax band the employee will be in, and set the maximum childcare vouchers on this banding accordingly. In reality though, given the very small take-up of this benefit, I think this is likely to be a quick job for most employers so should not be over stressed.

Finally…

Also don’t forget that Childcare Vouchers count as a ‘non cash benefit’, and therefore should be continued at the employers expense throughout maternity leave. This is a big subject, and I am happy to field any questions on this should they arise.

All in all, this remains a very attractive benefit to both employer and employee. Organisation that support Childcare Vouchers should make sure that they communicate this deadline as soon as possible to assist their employees.

Hope this helps.

Best regards

Steve