Child Care Vouchers
After the government introduced the family-friendly policy in April 2005, which provides tax and NICs relief for employer approved childcare and encourages mothers back into the workplace, the scheme of providing Child Care Vouchers has been under attack.
As part of his main speech at the Labour Party conferences, Gordon Brown announced a measure which would give 10 hours of child care to 2 year olds, and at the same time remove the current tax and NIC reliefs enjoyed on the provision of Child Care Vouchers by employers. The government is becoming increasingly aware of the take-up of tax efficient schemes, and with its recent increased spend, is conscious that its income from tax revenues has fallen rapidly.
Under the changes from April 2005 (where an employer gave their employee childcare vouchers) the first £55 per week (originally limited to £50) is free from both tax and NICs if certain qualifying conditions were met. The childcare must be registered or approved and the employee must have direct parental responsibly for the child.
Many employers and employees have been taking advantage of this tax loophole through Salary Sacrifice.
Salary Sacrifice is a contractual agreement between and employer and their employee to apply a pay reduction or pay cut. The Employee earns less and therefore pays a lower amount in Tax and NICs. As a reward for agreeing to the contractual pay cut, the employee provides a free non-cash benefit in kind.
Childcare Vouchers have become a popular form of Salary Sacrifice arrangement for many parents who have enjoyed the equivalent of tax reliefs of between £904 (for basic rate tax payers) and £1,195 (for higher tax rate payers).
The prime minister’s proposal is to end tax relief on all new Child Care Vouchers schemes for new entrants from April 2011 - with a full withdrawal in April 2015. As a consequence of the announcement, over 22,000 parents have already signed an online petition in an attempt to persuade Mr Brown to change his mind. Maria Miller retorted at the Conservative party conference that a Conservative government would not reduce the tax efficiencies on childcare vouchers.
As an alternate, the Labour Party has announced plans to provide 10 hours of free childcare a week for 250,000 two-year olds for families who are “on modest or middle incomes”.
It is estimated that currently around 35,000 employers operate a childcare vouchers scheme and that the benefit is enjoyed by over 340,000 employees.
Government statistics show that a third of tax relief (which equates to around £200 million per annum) goes to higher rate tax payers who earn more than £43,000 per annum.
The government consider all employees who pay 40% tax to be high earners and that it is not fair that around a third of tax relief for childcare goes to six percent of parents who pay higher rate tax. At the same time both the Conservatives and Labour are toying with the idea of abolishing universal child benefits.
So what is proposed?
From April 2011, employees who join an employer supported childcare voucher scheme will not get tax or NICs relief exemptions. They will be liable to Class 1 NICs through payroll and potentially tax through P11D (and shortly after potentially being taxed at source through payroll if P11D removal proposals are progressed).
Parents who are on existing voucher schemes (those who joined their employer scheme prior to April 2011) will continue to receive both Tax and NICs relief and are not affected until April 2015 - when the voucher exemptions will be withdrawn completely. The change affects childcare vouchers only and does not impact the provision for workplace nurseries.
The announcement echoes the sudden removal of the Home Computer Initiative which was being heavily prompted as a Government backed scheme, with imminent implementation within major government departments about to occur if the withdrawal announcement had not gone ahead.
The operation of Child Care Vouchers by employer does still offer significant savings to employers' NIC liabilities where salary sacrifice is operated. The announcement is likely to see much protest against the proposals, but equally will stir interest in some employers to get on the gravy train at the earliest point while it lasts - just don't hang around too long.