Employers and accountants say they've had a rush of interest in changes to the government's childcare voucher scheme that will take place in April.
But tax advisers are warning parents and carers to be wary of what's inside the wrapping of new tax breaks which have been designed to help pay for childcare costs. Employees who take up the tax vouchers from April could be worse off or harming their pension benefits or other employee perks, tax advisers say. The scheme in place since 1989 but little publicised works by allowing employees to make savings on childcare through tax exemptions on national insurance contributions (Nics).
Under the scheme, employees forgo part of their salary to meet childcare costs with official childcare vouchers. Because the salary that is given up is exempt from Nics, parents only pay tax on their reduced salary, saving up to 11 per cent in Nics on the chunk of salary that is given up.
From April 6, the scheme will become more generous in that the fraction of salary used for it will be exempt from income tax and Nics. However, a new cap is being introduced which means that these tax breaks will become limited to the first £50 a week in childcare vouchers supplied by the employer.
Accor Services, the UK's largest administrator of childcare voucher schemes, estimates that those earning £31,000 a year and paying £200 a week in childcare costs will from April save £858 by joining the scheme. Those on £45,000 a year, with the same weekly childcare costs, will save £1,066 per year as they have more to gain from the new income tax breaks.
But Accor, which has about 30,000 parents signed up to the scheme, warns that there will be “pockets” of parents, mainly standard rate payers on the current scheme, who will receive less after April 6 because the amount of chilcare costs for which they can claim exemption from Nics will be capped at £50 a week. It is unlimited under the current regime. Middle to higher income earners are set to benefit most.
“The scheme is much more attractive for [higher income earners] now,” says Anne Ross, corporate business manager with Accor. Ross says that from April both parents can use the voucher scheme, although the tax benefit will be limited to one child.
However, experts warn that taking up the scheme in the form of a salary sacrifice, rather than a benefit in kind or part of a flexible benefits package, will come at a cost.
Under a salary sacrifice, an employee formally agrees to a pay cut and instead receives that amount in childcare vouchers. The contract between employee and employer is updated to reflect the employee's new reduced salary.
Tax advisers say this is where the sacrifice hits. By reducing your salary through the scheme you could reduce entitlements to other benefits including sick pay, statutory maternity pay and even future pay rises.
“The vouchers are not a complete gift,” says John Whiting, tax partner with PwC. “You are giving up something to get it.”
One area where a salary sacrifice may affect future benefits is pensions, particularly if the individual is on a final salary scheme.
”If you your salary goes down from £20,000 to £18,000, for example, your pension will go down too,” says Stephen Quest, tax partner with Grant Thornton. The other key consideration is the impact of a salary sacrifice scheme on tax credits.
Anne Redstone, tax partner at Ernst & Young, points out that some low income earners will not benefit from the April changes.
“The interaction between tax credits and the vouchers means that, for low income households on maximum tax credits, the vouchers are neutral …they bring no benefit to the recipients because the vouchers simply cancel out money they would otherwise receive using tax credits,” says Redstone.
“Salary sacrifice arrangements will only improve the financial position where there are either no tax credits, or they are entitled only to the family element. Thus it [the voucher scheme] is of no value for lower income households. “
Outside the work arena, a salary sacrifice scheme may affect your capacity to borrow money on a mortgage because lenders may receive a statement from your employer showing your reduced earnings. The Inland Revenue says it is up to the employer and employee to discuss what benefits may be affected by the scheme and for individuals to seek advice on how the scheme will affect their entitlement to tax credits.
From April, the vouchers can be used only for registered or approved care, such as day nurseries, childminders and nannies and not for relatives providing care in the home, as is currently the case.