Changes to childcare voucher scheme

The existing tax-free employer childcare voucher scheme is to be scrapped, with a more generous system set to take its place.

The new tax-free childcare scheme (TFC) will be introduced in autumn 2015 and will be available to households where both parents (or the single parent) are working and paying tax, and neither parent earns more than £150,000 a year.  

Under the scheme, which is expected to see parents able to open an online voucher account, the Government will top up any payments made by parents.  This means that for every 80p paid in by parents, the Government will top this up by 20p, up to an annual maximum of £1,200 per child.

Under the current system, employers can offer vouchers for staff with children to redeem with Ofsted-regulated childcare providers.  Although these can be of any value, the amount qualifying for tax and National Insurance (NI) exemption is capped at £933 for employees and £402 NI for employers.

At present, childcare vouchers are typically offered by employers on a ‘salary sacrifice’ basis, where the employee gives up a percentage of their pay in exchange for the vouchers.  Under the new system, this will stop, with employers having to pay the equivalent amount of salary which was previously being sacrificed for the vouchers.  Because the salary will be subject to tax and NI, employers will lose their £402 per employee NI saving, which means some employers may wish to think about other NI-free benefits they can offer employees instead.

The new scheme will not affect employers who provide free onsite childcare, as this will still count as a benefit in kind, free of tax and NI.

For further information, please contact Tim Preece at the office.