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Tuesday, 3 December 2013

Tax-Free Childcare Proposal for 2015 - Understanding the Issues

The Government's plans for reforming childcare vouchers from 2015 are now well underway.  A consultation exercise covering the implementation of the proposed Tax-Free Childcare scheme closed on 14th October, and our response to the consultation can be viewed here.  The Government is now obtaining advice on the best market structure for the proposed scheme.

While KiddiVouchers welcomes the Government's focus on helping working parents, we remain concerned that the proposals for Tax-Free Childcare are flawed.  The childcare voucher industry has been unanimous in advising that the aims of Tax-Free Childcare could be achieved in a more efficient and cost-effective manner by simply amending the existing childcare voucher scheme.

Key points which we have asked the Government to consider include:
  1. Although the Government has consulted on the details of tax-free childcare, there has been no consultation on the underlying policy of replacing Employer-Supported Childcare (ie the current childcare voucher system) with the proposed Tax-Free Childcare scheme. We believe the underlying policy decision was taken without a full understanding of the current scheme and without an accurate cost-benefit analysis. We recommend that the Government should now pause to consider alternative solutions, including comparing the relative merits and costs of Employer-Supported Childcare, Tax-Free Childcare and intermediate models, examples of which are included in our consultation response.

  2. The Government has claimed that Employer-Supported Childcare is not available to a high enough number of working parents, with the result that fewer parents than desired are taking advantage of the tax-break. They appear to believe that employers are sometimes reluctant to set up a childcare voucher scheme and therefore some parents are being denied access to Employer-Supported Childcare. Along with other childcare voucher providers, we believe that the problem is not one of accessibility but rather of publicity. If the Government wishes to improve take-up of tax breaks on childcare, there are simple measures which could be taken to address this, such as engaging in public campaigns to raise awareness amongst parents. Separate facilities should also be introduced to make childcare vouchers available to the self-employed and to cater for the minority of parents whose employers decline to operate a scheme.

  3. The interactions between childcare vouchers and tax credits are complex and have tended to cause confusion for parents. The planned interactions between Tax-Free Childcare and Universal Credits appear to do nothing to reduce this complexity; instead, the current proposals require more extensive eligibility checks to prevent Tax-Free Childcare being provided to recipients of Universal Credit. We strongly recommend that the Government should break the link between Tax-Free Childcare and Universal Credits. This could be achieved by reducing the amount of childcare support available through Universal Credit, but at the same time allowing Universal Credit recipients to top-up their support to the original level by allowing them to use Tax-Free Childcare. This would provide clear cost savings, avoid the need for parents to choose between the two methods of support, minimise the scope for error and fraud and make Universal Credit recipients better prepared for when their Universal Credits eventually cease.  The SCMA has also called on the Government to allow recipients of Universal Credits to use childcare vouchers, as their members believe this reduces the risk of parents defaulting on childcare payments.

  4. The proposed Tax-Free Childcare scheme excludes couples where one parent is out of work or chooses not to work. Press comment on this issue appears to have confused the question of whether Tax-Free Childcare should be available to households where only one parent is in work with the separate issue of whether stay-at-home parents should receive any financial support for the nurturing role they perform. We would suggest that this latter issue should be dealt with separately and should not be allowed to cloud the issue as to whether such households should be eligible for Tax-Free Childcare. Instead, we recommend that the Government should focus on which parents are likely to require formal childcare and on the reasons why they might use childcare. In our experience, the overwhelming reason why parents pay for childcare is to enable them to work. A scheme aimed at making childcare more affordable would therefore naturally seem to assist the target audience of working parents, without the need for extensive eligibility checks. The Government's own research supports our view that parents who are not in work rarely pay for formal registered childcare. We recommend that the Government should conduct a full cost-benefit anaylsis, comparing the extensive cost of employment-based eligibility checks with the cost of allowing such households to access the scheme on the rare occasions that they wish to do so.

  5. The current proposals do not offer adequate protection for existing childcare voucher scheme members. Parents who move between employers after Autumn 2015 will be forced to leave the Employer-Supported Childcare system. We recommend that they should have a right to join their new employer’s dormant childcare voucher scheme within three months of changing employment.

  6. Parents of over-5's who wish to enter the employment market after Autumn 2015 will not be able to access either the current childcare voucher scheme or the new Tax-Free Childcare scheme. In order to prevent parents of older children from being excluded from childcare support, such parents should be allowed to join their employer’s dormant childcare voucher scheme until Tax-Free Childcare is fully phased in for older children.
We will continue to encourage the Government to address the unintended consequences of the 2015 proposals, with the aim of ensuring the new scheme is of genuine benefit to parents, employers and childcare providers.

More information about childcare vouchers, the proposals for Tax-Free Childcare and our consultation response can be found at www.kiddivouchers.com.

Friday, 22 March 2013

The Government announces changes to childcare vouchers from 2015

As childcare costs continue to rise, the Government has used the 2013 Budget to announce new measures to support working parents. The proposals will make childcare vouchers available to more families and will enable many parents to enjoy higher savings on their childcare costs. However, not all families will be able to benefit from the changes. Here's our guide to the new childcare voucher scheme and a look at the winners and losers:
  • A new childcare voucher scheme, due to be launched during or after Autumn 2015, is expected to allow parents to receive Government funding for up to 20% of their childcare costs.
  • Current childcare voucher arrangements are to remain in place and open to new members until the new scheme is launched.
  • Parents who sign up for the current childcare voucher scheme will be able to remain in it even after the new scheme has launched. However, some current scheme members may choose to switch to the new scheme from 2015, as in some cases this will provide higher savings.
  • Under the new arrangements, parents will set up an account with a childcare voucher provider such as KiddiVouchers, and they will pay into this account to purchase childcare vouchers. The Government will top up each parent's childcare voucher account with a 20% contribution towards their childcare costs, up to a maximum contribution of £1,200 a year per child.
  • Under both the current scheme and the new scheme, parents are only allowed to use their childcare vouchers to pay for registered childcare.
  • The new scheme will initially only be available in respect of children under 5, although there are plans to make it available for all children under 12, probably by 2020.
  • The new arrangements will only be available to single parents who work at least 16 hours a week, or to couples who both work at least 16 hours a week.
  • The Government has also announced that lower earners will be eligible for up to 85% of their childcare costs to be paid by Universal Credit from April 2016 (compared to up to 70% in the current tax credit system). Parents who receive tax credits or Universal Credit will be ineligible for childcare vouchers.
The winners and losers
  • Parents who sign up to the current childcare voucher scheme will be able to remain in the scheme, so they will not be directly disadvantaged by the proposed 2015 changes. However, if they move to a new employer after 2015 they will probably be considered to have left the current scheme and be forced to switch to the new arrangements.
  • Some parents will not be ready to use childcare vouchers until after the new scheme starts. In some cases, these parents will receive lower savings from the new arrangements than they would have had under the current scheme.
  • The new scheme will not be available to families where either parent earns over £150,000, whereas the current scheme allows high earners to enjoy tax savings at the same level as basic-rate taxpayers.
  • The current scheme allows basic-rate taxpayers to order up to £243 a month in childcare vouchers. In a two-parent family with both parents claiming childcare vouchers, this provides savings in tax and National Insurance of £1,866, regardless of how many children are in childcare. However, the new scheme provides maximum savings of just £1,200 per child.
  • Therefore, for couples with only one child in childcare, the current childcare voucher scheme offers higher savings than the new scheme.
  • Couples will be better off under the new scheme if they have two or more children under 5 and their annual childcare costs exceed £9,330 for basic-rate taxpayers or £6,250 for higher-rate taxpayers. Couples with only one child, or with lower childcare costs, or with one parent out of work, are better off under the current regime.
  • Single parents will be better off under the new scheme if they have one or more children under 5 and their annual childcare costs exceed £4,665 for basic-rate taxpayers or £3,125 for higher-rate taxpayers.
  • The new arrangement will not provide any National Insurance savings (currently worth up to 12% for basic-rate taxpayers and up to 13.8% for employers). For some employers, this will be a significant loss, which could have a knock-on effect on the amount which they are able to spend on other employee benefits. Local authorities and NHS Trusts are among the employers who will be hit, potentially leaving a hole of hundreds of thousands of pounds in their budgets. However, as the new scheme will be phased in gradually, employers will at least have time to prepare for this change.
What action should parents take?
Parents who aren't already using childcare vouchers should ask their employers to set up a scheme now, rather than waiting until the new scheme is launched in 2015. Employers enjoy National Insurance savings from the current scheme, so it is in their interest to set up a scheme before the 2015 deadline.
Will there still be a role for employers in the new scheme?
Although the new arrangements take the onus away from employers, we believe employers will still have a key role to play. Many parents use childcare vouchers as a way of budgeting for childcare costs and appreciate the benefits of their childcare payments being taken direct from salary. We anticipate that employers will, in many cases, wish to support their employees by gradually replacing their existing salary sacrifice schemes with voluntary payroll deduction schemes. Although employers will no longer benefit from National Insurance savings, providing easy access to childcare vouchers will still allow them to enjoy the benefits of better staff engagement and higher morale.
So is the Budget good news for childcare?
It's certainly welcome that the Government is taking the issue of childcare seriously and continuing to offer a tax break to working parents. The new proposals are generally considered to be a step in the right direction, but many parents need financial help now rather than waiting until 2015. Arguably it would have been simpler and more effective to increase the tax-exempt allowance on the current childcare voucher scheme with immediate effect, and to simply tweak the current scheme to make it available for the self-employed and lower earners.
Although the new scheme aims to make childcare support open to more parents (including the self-employed and those on the National Minimum Wage), families with only one parent in work will lose out. The requirement for both parents to be in work is likely to be painful for parents who have experienced redundancy or who are unable to find work. In these cases, parents are often reluctant to cease using childcare, for fear of losing their child's place with their chosen childcare provider. Where parents hope to return to work quickly, or where they are actively seeking work, it is often not practical for them to stop using childcare.
The requirement for parents to be in work is aimed at making work pay, but it could be said to under-value stay-at-home parents. These parents may also have a real need for childcare, for example to broaden their child's development, to accommodate voluntary work or training, or to have a break from the hard work of full-time parenting. We will be asking the Government to simplify the new scheme and to broaden its appeal by rethinking this restriction.
We also continue to recommend that tax credit support should be provided to parents in the form of childcare vouchers. We believe this would help parents to budget for childcare costs, ensure the support is used to pay for registered childcare and lead to improved efficiency. The extension of the new scheme to parents on National Minimum Wage is to be welcomed, but in many cases low earners receive support through tax credits and so will not be eligible to benefit from childcare vouchers.
In some cases, the new proposals will provide higher savings for parents. However, not all parents will benefit and the administrative details have yet to be finalised. We look forward to taking an active role in Government consultations as the details of the new scheme are ironed out. We continue to press for further improvements and to champion the needs of parents, employers and childcare providers alike.
Useful links
If you would like to find out more about working with KiddiVouchers, or for information on our wider employee benefits, call free on 0800 612 6110 or email business.enquiries@kiddivouchers.com.

Friday, 8 March 2013

Getting ready for the 2013-14 tax year

With the new tax year just around the corner, it's the perfect time to prepare your annual childcare voucher earnings assessments. Since 6th April 2011, earnings assessments have been required whenever an employee joins the scheme and at the start of each new tax year.
The higher-rate tax threshold is due to fall on 6th April, so some employees will become subject to higher-rate tax for the first time. For the purpose of earnings assessments, any employees with post-sacrifice earnings in excess of £41,450 will be considered to be higher-rate taxpayers (compared to the current threshold of £42,475). For employees who joined the scheme after 6th April 2011, this will mean that their tax-exempt childcare voucher allowance will fall from £243 a month to £124 a month.
Also, additional-rate taxpayers will become subject to a tax rate of 45% instead of the current 50%. In recognition of this, the tax-exempt voucher threshold for additional-rate taxpayers will be increased from £97 a month to £110 a month.
Further childcare news is expected in the Budget on 20th March, but meanwhile we are advising employers to make preparations to keep their childcare voucher schemes compliant. We recognise that this is a busy period for HR and Payroll professionals, so we'd like to offer a helping hand. We've produced a free guide to earnings assessments, covering areas such as:
  • Which scheme members need an earnings assessment
  • What to do about employees who are on a break from the scheme
  • How to allow for future changes, such as an agreed pay rise or a planned period of maternity leave
  • A handy calculation template
KiddiVouchers schemes are designed to make life easy for employers, so we offer the following services as standard:
  • Free earnings screening when employees register
  • Clear notifications to advise employers about new members
  • A live online account, highlighting which employees need an earnings assessment
  • An online calculator, plus hard copy calculation templates
  • HMRC-compliant recording facilities, allowing you to store and access all your earnings assessments online
  • A wide range of variations to fit in with your payroll systems
If you would like to find out more about working with KiddiVouchers, or for information on our wider employee benefits, call free on 0800 612 6110 or email business.enquiries@kiddivouchers.com.