Tax Free Childcare Finally Arrives
What’s the Update?
After much delay, it has now been confirmed that the Government Tax Free Childcare scheme, which was due to launch in 2015 but was subsequently pushed back, will come into force this year. It will be rolled out gradually to eligible parents from April onwards. All eligible parents will be able to join the scheme by the end of 2017.
How does it work and what are the differences between this and childcare voucher schemes?
Traditional childcare voucher schemes usually operate via salary sacrifice, so employees sacrifice part of their salary to purchase vouchers to pay for their childcare.
The benefit to the employee, is that the vouchers are purchased from pay before it is received (and therefore before tax is deducted). The maximum voucher value is £243 per month, which would result in an annual saving of £933 for a basic rate tax payer, £6254 for a higher rate tax payer or £620 for an additional rate tax payer.
The new Government scheme will be offered to all parents (including the self-employed), who earn less than £100,000 per year. They may pay up to £2,000 per year into the scheme for each of their children under the age of 12, or if the child is disabled they may pay up to £4,000 up until the child is 17.
For every 80p a parent pays into their childcare account, the government will top it up to £1. The scheme is being referred to as tax free, on the basis that most people pay 20% tax.
Others, such as Grandparents may also contribute to the account and the money may be withdrawn if the circumstances change and it is no longer needed.
So what does this mean for employers who currently operate childcare voucher schemes?
Existing Childcare voucher schemes will continue to accept new members until April 2018 and the schemes themselves will continue to run for as long as members continue to use them. In essence, they will die out over a period of time.
As an employer, you are not obliged to continue operating a voucher scheme unless it is a contractual benefit, which generally they are not. However, it would be wise to consider keeping your scheme running until all of your employees have been entered into the new scheme.
As the new scheme will not be offered to employees who earn over £100,000, if you have high earners in your employee population, they may wish to stay in the existing scheme for as long as possible.
However, if your employees generally earn less than £100,000, this is a great opportunity to be on the front foot with them as an employee engagement activity! Even better, the scheme will operate through online accounts, administered by parents themselves, so unlike the voucher schemes, there is no administration or cost burden on the employer.
PlusHR have written a guidance presentation for clients to share with their employees so they can ensure everyone is up to speed on the changes. You can download a free copy here.
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