Childcare vouchers and Tax Free Childcare

In April 2017 the Government launched a new Tax Free Childcare (TFC) scheme which is intended to be a replacement for childcare vouchers.

Parents can either claim childcare vouchers or TFC – not both.  It is therefore important for both employers and employees to consider whether childcare vouchers or TFC are appropriate for them. 

It was previously announced that, from April 2018, childcare vouchers would be closed to new entrant.  This would mean that:

  • If parents were not already signed up for vouchers at that time they would not be able to claim them in the future. 
  • Employees already receiving childcare vouchers at that time could continue to receive them as long as their employer runs the scheme or until they change employer.

The Government still intends to close childcare voucher schemes to new entrants, but as at the date of this article (23 October 2017), no legislation has yet been introduced to repeal the childcare voucher rules and currently the two schemes continue to run side by side.

What are childcare vouchers?

Childcare vouchers are often supplied by employers under salary sacrifice arrangements - employees give up the right to pay in exchange for vouchers which they can use to pay for their childcare.  The amount surrendered by the employee is not subject to income tax, or employer / employee Class I NICs. 

There are maximum limits on the amount of childcare vouchers that can be received tax free which depend on how much the employee earns.

What is Tax Free Childcare (TFC)?

Unlike childcare vouchers, TFC operates independently from employers:

  • Parents set up an online account which they use to pay for their childcare. 
  • Contributions into this account are topped up with the equivalent of basic rate tax by the Government – i.e. for every £8 parents put in, the government will add £2.
  • Parents can receive up to £2,000 per annum per child in top up payments from the government (£4,000 for disabled children).
  • If one parent earns more than £100,000, TFC is not available.

Unlike childcare vouchers, under TFC:

  • There is no salary sacrifice involved, and therefore no direct income tax or NIC savings.
  • There are no employer NIC savings.
  • There is a minimum earnings requirement of £120 per week and, in the case of a couple, both parents have to work.

What to do now

Parents and employers need to consider whether they would prefer to receive childcare vouchers or receive relief under TFC.

When deciding whether to offer, or continue to offer, childcare vouchers employers should consider:

  • The preferences of their employees and impact on employee relations.
  • The balance between the NIC savings available under childcare vouchers and the cost of administering such schemes.

Further information on the different features of childcare vouchers and TFC can be found here.

Posted in: Employment