At Rawlinsons, we are often asked questions from business clients about childcare vouchers. As an employer providing childcare to your employees, you have certain tax, National Insurance and reporting obligations.
Childcare vouchers are included within the exemptions available from Income Tax and National Insurance Contributions. The amounts that can be exempt depends on the type of tax payer your employees are;
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If your employees pay these amounts then you do not need to pay or report anything to HMRC. However, there are conditions for the records you need to keep – see below.
Most employers will offer a salary sacrifice scheme so that the employee has a pay reduction in the sum of the tax free amount, so for a basic rate tax payer, this would be £55 per week. The employee then receives a voucher for £55, which they can use to pay for registered childcare.
The salary sacrifice cannot reduce the employees pay to below the minimum wage.
It is also worth your highlighting to an employee that the vouchers are taken into account when completing a tax credit claim and the employee may need to consider whether they will benefit financially when asking for childcare vouchers.
You have two options if you choose to offer childcare vouchers.
- Voucher providers like kiddivouchers.co.uk can operate childcare voucher schemes on your behalf, charging you an administration fee for the service. However, you will remain responsible for the correct deduction of tax and payment of NICs even if you use these companies.
- You can produce and administer childcare vouchers yourself as long as you make sure conditions for tax and NICs exemption are met and you keep records to support your scheme.
There are three conditions you need to be met before offering an employee the vouchers, separate from the childcare vouchers & tax issues. These are as follows;
1. The scheme is generally available to all employees
For any of your employees to qualify for the exemption, you should provide childcare vouchers in a scheme that is:
- open to all of your employees, or
- open to all of your employees based at the location where the scheme operates
This means that you should not exclude any employees from your scheme, for example on the grounds of:
- seniority or position
- level of pay
- length of service
But, this does not mean that all employees have to participate.
For example, employees who cannot or choose not to participate may be those:
- without children in qualifying childcare or whose children are over the qualifying age limit
- whose benefit from the childcare element of Working Tax Credit is greater than the saving in tax and NICs from vouchers
You will need to keep:
- a copy of the letter or poster used to advertise your scheme to your staff, or
- your staff handbook where this includes details of eligibility
2. The child is a qualifying child
The child for whom the childcare voucher is provided must be:
- a child or stepchild of the employee, or
- a child who lives with the employee for whom he or she has parental responsibility
A child is a qualifying child up to:
- 1 September following their 15th birthday
- 1 September following their 16th birthday, if they are disabled
You will need to keep:
- a record of the child’s date of birth, indicating where appropriate if the child is disabled
- a note of the relationship between the child and your employee if the employee is not the child’s parent
3. The childcare is registered or approved
The exemption applies in the tax week in which you provide the childcare vouchers to your employees. You must be satisfied at that point that the vouchers will only be used to pay for registered childcare.
Note: Your employees do not need to use the vouchers in the week or month they are provided and can save them, for example, to meet higher childcare costs during school holidays.
You will need to keep:
- a copy of your scheme rules that includes a requirement for employees to notify you of any change in circumstances in relation to the child or childcare
- a record of the childcare provider’s name and, if applicable, registration number or approval number
- a note of when, if applicable, the childcare provider’s registration or approval is due to expire
Note: You may want to remind your employees to check their carer’s registration or approval status in good time before entitlement to exemption expires.
Alternatives to Childcare Vouchers
Working parents can now start applying for two new government childcare schemes launching this year – Tax-Free Childcare and 30 hours free childcare.
Tax Free Childcare
Working parents of children, who will be aged under 4 on 31 August 2017, can now apply through the new digital childcare service for Tax-Free Childcare and receive a government top-up of £2 for every £8 that they pay into their Tax-Free Childcare account, up to £2000 per child.
All parents of disabled children under 17 years old will also be able to apply for Tax-Free Childcare.
If your employee tells you that they have started to use the Tax-Free Childcare scheme you must stop giving them Childcare Vouchers. If this means stopping or changing a salary sacrifice arrangement, you must also update your employee’s contract.
30 hours Free
From September, working parents of three and four-year-olds living in England are also be entitled to the new 30 hours free childcare offer, worth around £5,000 per child.
Parents will only need to make a single application for both schemes when their children become eligible.
Childcare vouchers are being phased out in favour of the new Tax Free Childcare (TFC) scheme, with vouchers being closed to new entrants from April 2018. Parents can either claim childcare vouchers or TFC (not both). It is therefore important, ahead of April 2018, for both employers and employees to consider whether childcare vouchers or TFC are appropriate for them.