Savings
The introduction of the £50 per week tax exemption for vouchers and other childcare is designed to encourage more employers to provide financial assistance for childcare costs to their employees.
An employer taking advantage of the full £50 per week could save over £300 in NI per employee per year. An employee could save up to £850 a year if they are a basic rate taxpayer rising to over £1,000 for a higher rate taxpayer.
Who can benefit?
There is no restriction on the nature of the employers and employees who can benefit. Director/shareholders of family companies and owner managed businesses are free to participate and enjoy the benefits. In a husband and wife company where both are higher rate taxpayers the total annual savings could amount to over £2,500.
Note that the regime is restricted to employees (including directors) so that the self employed are not able to take advantage of the benefits.
Vouchers
Employees already receiving vouchers substantially in excess of the new £50 limit may find they are worse off under the new rules because although there is now a tax exemption, albeit capped at £50 per week, the NI exemption is also capped at £50.
A number of organisations provide childcare vouchers. Employers need to be sure that their chosen provider is able to meet the new conditions. The exemptions will only apply if the vouchers are used to meet the cost of approved childcare.
Vouchers may be a more effective mechanism than the employer paying for childcare directly. This may be particularly so where an employee only needs to use childcare at certain times of the year for example during the school holidays.
| Example Harriet needs childcare for 15 weeks of the year. The weekly cost is £170. If her employer pays for this directly, only £50 per week - ie £750 in total will be exempt and the balance (£1,800) liable to tax and NI. If on the other hand Harriet receives a £50 childcare voucher each week, there is nothing to stop her ‘saving these up’ for use when she needs them in the school holidays. The exemption is not compromised and the benefit of the £50 exemption is effectively averaged. |
Salary sacrifice
Some employers may decide to operate a childcare ‘salary sacrifice’ scheme whereby the employee formally agrees to give up part of their salary in exchange for childcare vouchers or other employer-provided childcare. The possible savings for both the employer and the employee have already been identified above.
Employers should be aware that salary sacrifice schemes should only be put in place after obtaining professional advice. It is all too easy to get it wrong and end up with a scheme that doesn’t work as intended. In addition, establishing a scheme represents a variation of the employees’ terms and conditions and therefore requires consultation and agreement. Please talk to us if a salary sacrifice scheme is of interest to you.
Employees should be aware that they will not have an automatic right to ‘change their mind’ and opt back out of the scheme or at least not immediately. Employees should also consider if they enter into a scheme what their pay will be for the purposes of pay rises, bonuses, pension provision etc.
Salary sacrifice would probably not be appropriate for employees in receipt of Working Tax Credit (including the childcare element) because part of the entitlement to these credits is based on childcare costs paid personally rather than by the employer.