Childcare Vouchers (CCV) v Tax Free Childcare (TFC)

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The Government’s response to the Tax Free Childcare (TFC) Consultation was released on the 18th March – the day prior to the main budget announcement.  With hindsight it is easy to see why this was released prior to George Osborne’s speech, as this important topic would have otherwise been largely eclipsed by the huge pension changes just a day later. 

The announcements on pensions have been (understandably) occupying the lion’s share of my time for the last few weeks, but I did promise to add more comment and insights on the childcare topic and this post aims to deliver just that.

So what can I add to my brief post of the 18th March?

Well for starters I can provide you with the link to the Government’s response to the Delivering Tax-Free Childcare Consultation document for those that want to read further on this.  This can be viewed here:   http://goo.gl/4fMv8u

As Consultations go, this one actually did succeed in gaining some genuine input from stakeholders.  Parents, childcare providers, employers, and benefit consultancies all contributed, with the document claiming some 35,000 responses in total.

For those who don’t fancy reading the full 80 pages at this time, I can provide the following commentary and insights:

  • Tax Free Childcare is targeted to commence in autumn 2015.
  • Tax relief on childcare costs will be restricted to Basic-Rate relief (i.e. 20% of childcare costs).
  • The relief is to a maximum of £2,000 per child, per year (a significant increase from the original proposal of £1,200 per child, per year). 
  • Children up to the age of 12 will be eligible “within the first year” of the scheme’s commencement.  This is a little vague for my liking, but the exact timetable of the Government proposals are yet to be published.   
  • Single parent families where the parent works, and two parent families where both parents work, will be able to access TFC as long as neither parent is an additional rate taxpayer.
  • There is a minimum earnings requirement also.  Parents will have to work at least 8 hours on the National Minimum Wage (or above) to qualify.
  • Parents will have a single point of contact for registering and accessing their TFC funds.  The provider for all TFC will be National Savings & Investments (NS&I) – there will be no other choice of provider.  There will not be any fees taken from the NS&I accounts.
  • Parents, family members, and even employers will be able to contribute to these online accounts.  It’s not at all clear what tax implications there would be for each party if the employer were to contribute direct, and at present I am struggling to see any advantage in doing so (other than a cosmetic “family-friendly” box-ticking exercise for the government and employers).  The Government will add their 20% contribution top-up directly to the accounts.
  • Money can be built up over time, and used to fund childcare costs when it is most useful/ convenient for the parents to do so.      
  • Should the money not be needed for childcare, the parents will be able to extract the funds (less the Government top-ups) to use as they wish.
  • The Consultation provides some outline solutions to some of the other issues that plagued the early thinking – such as those parents moving in and out of employment, fluctuating earners, or those that are temporarily absent.   

The bottom line here is that these proposals are well thought-through, and indeed a significant improvement on the initial outline offered in 2013.  The aim is to increase access to Government childcare support in the first year from less than 500,000 families currently – to close to 2 million. 

So, plenty of good news there for working parents. 

But what does this mean to employers and employees who currently utilise the existing Childcare Voucher system?

The impact on working parents:

It remains the case that the new proposals are not always going to be the best option for parents.

In my simple view there are three groupings of parents who may be significantly disadvantaged by the new Tax Free Childcare proposals when compared to the existing Childcare Vouchers system:

1)      It is clear that TFC proposals will not be extended to family units with two parents and only one earner.  Whilst such families are very much in the minority today, they still represent a significant percentage of the working population (and presumably an even bigger percentage of those family units with young children) so this is far from a moot point.

2)      The new proposals currently only extend to children under age 12, whereas the existing Childcare Vouchers scheme continues until nearly age 16.

3)      Whilst the new proposals are potentially more financially beneficial to a family, it does not follow that this is always the case. The principle differences here are the levels of tax relief provided, the cap on Government support, and the amount actually spent on childcare in any given year.

I don’t really have time to flesh out these arguments today, but suffice to say that generally a single parent family* (where the parent is a basic rate taxpayer) would be better off in an existing Childcare Vouchers scheme until such time as monthly childcare costs exceed £389.  Likewise, a two parent family* (again both basic rate taxpayers) would be better off in the existing schemes until their childcare costs exceed £778 per month.

And with the average cost of childcare for an under-two standing at £4.26 per hour** that equates to quite sizable amounts of childcare provision in each case.

So it’s clear that some employees will remain better off under the existing CCV system.

The impact on employers:

The Consultation response includes the following paragraph:

“When Tax-Free Childcare is introduced, Employer-Supported Childcare (childcare vouchers and directly-contracted childcare) will be closed to new entrants. Parents who are already receiving support through that scheme will be able to continue receiving support – in exactly the same way – for as long as they continue to work for their current employer, and the employer continues to offer the scheme.”

So employers can, if they wish, continue to offer Childcare Vouchers post autumn 2015 to existing members of the scheme. 

Given that many parents cite the cost of childcare as one of the biggest barriers in their return to work, and that recent surveys have sometimes found that childcare costs are higher than even a monthly mortgage payment, this is not a decision that should be rushed into be employers for the sake of administrative simplicity.   After all, the loss of government support between the old and new systems could make the difference between a key employee being able to continue to work or not.  It therefore remains the case that many employers should be somewhat cautious with how they react to the new system, and perhaps should assess their current users of the system before shelving an existing Childcare Voucher scheme in favour of Tax Free Childcare.

My next point for employers is one that may be easily missed.  The existing system of Childcare Vouchers carries an inherent National Insurance saving to the employer for every employee who saves via the vouchers.  For some employers with high usage this could amount to a sizable saving (which is often used to fund other items).  It’s therefore worth assessing what impact the withdrawal of such a scheme may have on the wider finances of the organisation.

Finally, and not least, it’s worth highlighting that employers that continues to offer existing savers the Childcare Voucher route after 2015 may well benefit from improved staff retention for that demographic.  After all, an employee who changes employment after that date will no longer be able to claim Childcare Vouchers, and will therefore only be able to claim Government support for childcare if they satisfy the new Tax Free Childcare criteria.  It might therefore be a shrewd retention move for employers to actively promote Childcare Vouchers membership between now and autumn 2015.

 

So, plenty to think about, and I will of course update the blog once the next stage of this process is known.

Best regards

Steve

* Where all parents have access to Childcare Vouchers

**Family and Childcare Trust briefing to House of Lords 09/01/14

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About the author

Steve Herbert is an award-winning thought leader on Pensions and Employee Benefit issues. His principal aim is better communicating the value and usage of employee benefits to employers. This he has achieved through many (highly successful) seminar series over the last decade, and his regular and widely read blog posts on the subject.
He also acts as a judge in HR and Employee Benefits industry awards, article writer, and product innovator. Steve is a regular contributor to DWP forums and compulsive responder to formal Government Consultations on pension and employee benefit issues. He is occasionally accused of making employee benefits interesting.