Proposed changes to tax-free childcare

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Carer with children

15 / 7 / 2015 Midnight

Changes to tax-free childcare (TFC) will now be introduced in early 2017, following a ruling by the Supreme Court. 

The government's response to the tax-free childcare (TFC) consultation, published in March 2014, proposed that the new TFC would be phased in from autumn 2015. However, the Supreme Court ruling has now delayed this date.

Under TFC, eligible families will receive 20 per cent support towards their childcare costs up to an annual limit of £2,000 government support per child. TFC will be administered through online childcare accounts provided by National Savings and Investments (NS&I).

TFC will be available to all households where both parents (or lone parent) are in permanent work, are not additional rate tax payers and are not in receipt of support through tax credits, universal credit or employer-supported childcare (ESC).

It is planned that ESC will be phased out from early 2017, it will not be available to new applicants. Employees already receiving support through ESC will be able to move to TFC or continue receiving support in the same way as long as:

  • they continue to work for their current employer
  • their employer continues to offer ESC.

The role of the employer under tax-free childcare

The government's response to the consultation states that there should be no mandated role for employers under TFC.

Some responses to the consultation indicated that both parents and employers would like to see employers continue to play a role in supporting their employees with childcare costs. As an employer, you can choose to fulfil an information role for your employees or make payments to your employee's childcare accounts.

Information role 

As an employer, you can choose to provide information to your employees on TFC. This will be a predominantly signposting role, directing employees to the childcare account website and where to register. Employers will not be required to verify identification or eligibility.

Paying directly into childcare accounts

You can choose to make payments directly into childcare accounts via one bulk payment. Unlike with ESC, you will not be required to complete basic earnings assessments or check remaining pay against the national minimum wage. This option would mean that parents would not have to make or budget for payments themselves.

Implications for employers

In its response, the government states that it wants as much support as possible to go directly to parents. Where ESC is currently offered through a salary sacrifice arrangement, employers receive a national insurance (NI) contributions disregard i.e. the employer does not pay NI contributions on the amount sacrificed. This saving is often used to support the administration costs of ESC. 

For employers currently offering childcare vouchers through salary sacrifice arrangements, the removal of this option will have operational, financial and reward implications including:

Transition and resources

You will need to plan for and manage the transition from ESC to TFC. For staff whose role it is to administer your childcare voucher scheme, you will need to consider how this resource is utilised post transition. Literature and marketing that includes information about accessing your current scheme will need to be updated or removed as appropriate. Depending what role you choose to fulfil for TFC, you will need to consider the resources required and cost implications.

Financial implications for employers of the loss of tax and NIC savings

Currently, by offering childcare voucher schemes as salary sacrifice, employers make savings on tax and NI contributions. As the tax-free vouchers will no longer be processed by employers, there are financial considerations that you need to take into account. You may wish to consider introducing other family friendly benefits into your organisation and you will need to look at the cost implications of offering these.

Workplace Nurseries

The government states that workplace nurseries will be unaffected by the introduction of TFC because employees will still be able to join a workplace nursery scheme offered by their employer even if they are in receipt of TFC. The removal of the salary sacrifice arrangements for childcare vouchers may have an impact on how your workplace nursery is funded.

Your total reward offering

Childcare vouchers can play a valuable part of an employers total reward offering and are used for recruitment and retention purposes. You may need to review your flexible working offering and consider what else you could do to support working parents and ensure that your total reward offering is still family friendly.

Our reward strategy toolkit has more information on planning, designing and implementing your reward strategy.

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