The Childcare Voucher Scheme is a UK government initiative aimed at helping working parents to benefit from tax efficiencies in order to save money on childcare. The scheme is offered by many employers as a salary sacrifice scheme and implemented through the employer’s payroll. This means that parents who are in the scheme are able to sacrifice part of their salary (Tax and National Insurance free) in order to obtain childcare vouchers of an equal amount up to specified limits.
The employer also saves money because the amount each parent sacrifices from their salary is exempt from employers’ National Insurance Contributions. Employers can offer the scheme themselves or by using one of the voucher companies to do the administration for them. The fees these companies charge should be less than the savings the employer makes on National Insurance. Employers may also benefit from having a happier workforce and seeing a reduction in staff turnover.
Basic rate taxpayers can pay for up to £243 of childcare with vouchers each month. This can lead to an annual Tax and NI saving of up to £930 per parent. Higher rate tax payers can pay up to £121 per month and top rate tax players can pay up to £108 per month. The higher and top rate restrictions only apply to those who joined the scheme on or after 6 April 2011.
These vouchers can be used for any nursery, playgroup, nanny, childcare or au pair who is an Ofsted registered provider. These vouchers can be saved up by parents but are non-refundable.
New Tax-Free Childcare Scheme from Autumn 2015
From Autumn 2015 Tax-Free childcare will be available to nearly 2 million households to help with the cost of childcare, enabling more parents to go out to work. Unlike the childcare voucher scheme the new Tax-Free childcare scheme will not be available to parents who have a stay at home partner. The new Tax-free childcare scheme will give a 20% tax break to cover annual childcare costs of up to £10,000, providing savings of up to £2,000 per child.
Parents will be able to register and open an online account for the new Tax-Free childcare scheme by going to the GOV.UK website. Parents and others can then pay money into their childcare account as and when they like. They will also be able to withdraw money if they want.
The scheme will be available for children up to age of 12 (or children with disabilities up to the age of 17). To qualify parents will have to be in work, earning just over an average of £50 a week and not more than £150,000 per year. Any eligible working family can use the Tax-Free childcare scheme as it does not rely on employers offering it. Unlike the current scheme, self-employed parents can use the Tax-Free childcare scheme.
Parents who sign up to the current childcare voucher scheme will be able to remain in the scheme and will not be disadvantaged by the proposed 2015 changes. However after Autumn 2015 the childcare voucher scheme will no longer be available for new entrants. The new arrangement will not provide any National Insurance savings for employers (currently worth up to 12% for basic-rate taxpayers).
Parents who sign up to the current childcare voucher scheme will be able to remain in the scheme. However, if they move to a new employer after Autumn 2015, they will be considered to have left the current scheme and be forced to switch to the new arrangements.
In general families with high childcare costs will be better off under the Tax-Free childcare scheme while families with low childcare costs will be better off remaining under the Childcare Voucher Scheme.