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Feature: Childcare vouchers and salary sacrifice explained

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9th Feb 2005
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By Sandra Beale of SJ Beale HR Consult

In an effort to reduce the costs of childcare for working parents or legal guardians the Chancellor has announced that as of 5 April 2005 employers can provide childcare vouchers up to a value of £50 per week free from tax and national insurance contributions; HR Consultant Sandra Beale explains how the scheme works.

To take advantage of this tax beneficial offer the employee formally agrees to give up part of their salary in exchange for the vouchers. This is known as salary sacrifice. Their employer also needs to have negotiated and implemented a voucher scheme with an appropriate provider.

This is a positive move that will encourage employers to provide assistance with childcare costs and mutual tax savings. The average employee, for instance, can save up to £850 per year by not paying 11% national insurance contribution and standard rate tax on the vouchers. Employees paying higher rate tax can save over £1,000 per year.

Any scheme that is implemented needs to be open to all employees not just to specific groups of staff. Both parents who are working can claim the benefit on the same child. Some employers, however, may restrict the eligibility for childcare vouchers to providing them only for children under the age of five.

The salary sacrifice scheme operates by the employer deducting an agreed amount from the employee’s earnings, which is then passed to the voucher company. Vouchers are then issued either to the employer to distribute to staff or direct to the employee to pay the registered childcare provider. There is no limit to the amount of childcare vouchers that can be issued but anything over £50 per week will be subject to national and tax deductions.

Registered childcare providers can include day nurseries (private, community or local authority), workplace nurseries, childminders, pre-school playgroups, nursery schools, out of school clubs and holiday clubs.

Unregistered child carers, such as nannies, will not be able to take part in the voucher scheme unless they become approved through a new voluntary approval scheme, which the government is currently setting up. They will be required to produce an enhanced Criminal Records Bureau (CRB) check, show an understanding of childcare by, at the bare minimum, attending an induction course on caring and hold a valid paediatric first aid certificate.

The carer or organisation responsible for childcare needs to be registered with the administering voucher company cost-free. They will provide their contact details, registration number and bank account details. The voucher company will then pay them directly into their bank account on receipt of the redeemed vouchers.

Most schemes are currently paper-based, but some are internet-based or e-voucher schemes. The administration charges are picked up by the employee’s company.

Committing to salary sacrifice is a variation of terms and conditions which requires the implementation of the appropriate consultation and agreement procedure. The contract is then updated or a separate agreement signed reflecting the change. The reduction in salary the employee has agreed to, the amount they should receive in vouchers and the time length should all be clearly detailed in such an agreement.

In general the period signed up to is usually one year and should employees wish to stop receiving vouchers and revert back to their usual salary or increase the value of vouchers received during this time, they may not have an automatic right to do so; this will depend on the clauses in the agreement. It may be possible to include a clause relating to an earlier review in case of a lifestyle change linked to birth, death or marriage.

Before entering into a salary sacrifice scheme for childcare vouchers, employees should be wary if receiving child tax credit and working tax credit. Also statutory maternity pay and statutory sick pay is based on average earnings and substitution of the corresponding value in childcare vouchers is not included. Employees should consult with their employer and/or tax office to fully understand the implications.

A further concern is whether under a salary sacrifice scheme the employee’s salary is treated as being net (excluding the value of the vouchers) or gross (including the value of the vouchers) for the purpose of employment conditions. This has implications for calculating pay awards and bonuses, pension and redundancy awards and possibly starting pay on promotion. The government is currently consulting over this issue and will provide guidance.

For more details phone Sandra Beale on T: 07762 771290 - email [email protected] or see the website at www.sjbealehrconsult.co.uk

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By helen oster
10th Feb 2005 12:49

The Chancellor has still failed to come up with a way of reducing the costs to children of working parents, or the availibility of child care. After school care is not the real issue, either in terms of availibility, financial cost or cost to children. The real issue is the availibility of school holiday care - and the cost in both financial and emotional terms. To retain an experienced, well-qualified workforce countrywide,and the development of confident, well-behaved youngsters, the Chancellor needs to give consideration to wide-ranging employment reforms that enable working parents to be with their chidren during school holidays

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By tandem
16th Feb 2005 08:38

Can I please have clarification on one point. In Sandra's article she states that vouchers over £50 will be subject to tax and NI. From the information I have read on the subject I understand that although vouchers over £50 will be subject to tax, they will not be subject to NI - is this correct?

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By AnonymousUser
15th Feb 2005 17:12

Just wanted to clarify some terminology used. "Deduction" from pay may be viewed by IR inspectors as failed salary sacrifice as the original earnings are being maintained.

Salary Sacrifice is a contractual change where an employee agrees to earn less, often in order to receive an alternate employer provided benefit-in-kind.

So with CCVs and salary sacrifice, the employee is agreeing to a pay cut in order to receive a free employer provided benefit. The CCV benefit received has certain tax and NICs exemptions.

The only pre-tax deductions that I'm aware of are: Pensions; Payroll Charitable giving; and approved Share Incentive Plans (SIPs which also enjoy NICs relief).

Unless a true reduction in pay takes place within the payroll it is advisable to gain IR tax office approval in writing of any other method of implementation to see if it will be considered effective.

P.Simon Parsons M.Sc FIPPMDip
Head of Payroll Processing & Legislatin, Ceridian Centrefile

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By AnonymousUser
18th Feb 2005 16:19

The only problem with childcare vouchers seems to be with employees who claim childcare tax credits. The claim has to be reduced by the value of the vouchers so an employee who currently claims £100 per week could only claim £50 per week if they received £50 in vouchers. This could result in a net loss of £35 per week in childcare tax credits, more than wiping out any tax or NI benefits.Any comments?

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Sandra Beale, HR consultant
By sbeale
16th Feb 2005 11:06

Joanna

In response to your comments I would reply that up to April 2005 the employee does not pay NI but does pay Income Tax on the value of the vouchers.

From April 2005 up to £50 worth of vouchers per week are both tax-free and NI-free (vouchers over £50 per week are subject to full Income Tax and NI).

The employer does not pay NI on the employee’s benefit of childcare vouchers, but after April 2005 this is restricted to £50 per week of vouchers.

I hope this clarifies things for you.

Regards
Sandra



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