Childcare vouchers are one of the most popular employee benefits available, as seen last year when working parents launched a protest against the government following plans to end the tax relief. Eventually this decision was reversed. They are currently offered by more than 33,000 employers to 340,000 working parents.
Cost benefits
Run as salary sacrifice schemes in the majority of cases, small business owners and their employees can both enjoy the savings, as neither party pays National Insurance (NI) on salary exchanged for the vouchers.
The vouchers are requested by working parents to pay for registered childcare. Parents exchange a proportion of their gross salary for vouchers, which are exempt from income tax and NI and can provide parents with the equivalent of a 31 per cent saving on the first £243 they spend on registered childcare costs per month. Not only can vouchers be used for nursery and pre-school care but also for a variety of out-of-school clubs.
Basic rate taxpayers can saveup to £904 each year (subject to individual circumstances. Higher or additional rate tax-payers may save more). This means that for both working parents with children up to the age of 16, the scheme can offer a great way to maximise their income.
Easy access
It is a common misconception that childcare vouchers only benefit larger businesses, and smaller employers are often wary of the administrative burden. However, there is little paperwork. In fact, the service is exactly the same for smaller employers as for large firms. And as employers also save money through NI exemptions, the scheme remains cost neutral to operate.
The threat of pay freezes, redundancy and an increased workload has put pressure on employees, especially mothers, many of whom feel they have no choice but to return to work after having children. So the schemes can also improve morale, act as a staff retention tool and aid recruitment, which is particularly appropriate given the effects of the recession on the working population.
From 6 April all new users of childcare vouchers, regardless of how much they earn, will receive the same income tax relief as basic rate taxpayers. However, existing users of the scheme will not experience these alterations and all will continue to enjoy the considerable savings generated by childcare vouchers.
For more information visit the HMRC website.
