Childcare Vouchers To Tax -Free Childcare (TFC) – The Important Questions Answered
Since 4 October 2018 no employees can start to receive tax-exempt childcare support from you as their employer. Tax-Free Childcare (TFC) has replaced the old regime; what do you need to know about it?
The government has been uncomfortable with the popularity of childcare vouchers for some years. It never imagined when it introduced the tax exemptions in 2005 that employers would almost universally offer childcare support through salary sacrifice, and in so doing reduce the amount of tax and NI payable to the Treasury. It’s taken employers out of the provision of childcare support by removing the tax exemption and offering direct support from the government to parents. This affects all those employees who were not receiving childcare support before 4 October 2018.
Types of employer-provided childcare
There are three types of childcare provided by employers:
- childcare vouchers;
- directly-contracted childcare; and
- workplace nurseries.
Childcare vouchers are tax and NI free up to £55 per week, or £243 per month, depending on when the employee first received them from their employer. Employees who began to receive them before 6 April 2011 receive these values tax free, regardless of their rate of tax; employees first receiving vouchers after that date have lower tax-free values related to their marginal rate of tax:
- £28 per week, £124 per month for a 40% taxpayer
- £25 per week, £110 per month for a 45% taxpayer.
You should carry out a basic earnings assessment at the start of each tax year for those who joined from April 2011 to work out the tax-free amount for that year. Use the English tax bands even for Scottish taxpayers.
Directly contracted childcare is where the employer reduces an employee’s pay and pays that over to their registered childcare provider. The same tax-free limits and basic earnings assessment rules apply.
Workplace nurseries are a very generous benefit. Employers who fund a workplace nursery have no limits on the value of that funding.
The nursery doesn’t have to be on your premises, but you must be involved in the management and financing of it.
Why 4 October?
Originally this change was going to come into effect on 6 April 2018, with parents instead able to sign up to the government’s alternative support, known as Tax-Free Childcare (TFC). This involves parents opening an online account into which they deposit money on a quarterly basis which is then topped up with 20% tax relief by the government, regardless of their rate of tax.
The new scheme is more attractive to many parents as it is based on childcare costs per child, not an exempt amount per employee as with employer-provided childcare. Parents simply must be working or self-employed and earn between £120 per week each and £100,000 per annum. Parents can deposit up to £2,000 per quarter for each child and receive £500 worth of support from the government. Sadly, the IT to support the rollout was particularly unstable so the government extended the deadline for the closure of employer-supported childcare by six months and announced a new date of Thursday 4 October.
Parents with disabled children can deposit up to £4,000 per quarter and receive £1,000 of government support.
Why is the date important?
To prove that an employee has sacrificed their salary successfully, they must have signed a new contract to give up their pay before the start of the pay period in which they begin to receive childcare support from their employer. This will mean for monthly paid employees, new contracts must have been signed by 30 September at the latest, and for weekly paid by the end of the pay period immediately before the pay period where 4 October falls.
The legislation that ends the exemption, the Income Tax (Limited Exemptions for Qualifying Childcare Vouchers and other Childcare) (Relevant Day) Regulations 2018, requires that you must be in employment by 3 October to qualify to receive childcare support from the new employer.
Is the new scheme better?
It’s not for you to advise employees what childcare support is best for them. The Childcare Choices website is a really good source of advice but it’s worth remembering what differentiates the two schemes. The employer-supported childcare exemption ends when the child turns 16, whereas TFC only includes children up to twelve. Where an employee is receiving employer-supported childcare they aren’t entitled to childcare support in tax credits or Universal Credit up to the level of support provided by their employer. When they choose to join TFC, all tax credits and Universal Credits are stopped.
Losing the right to tax-exempt childcare
To not be classed as having given up employer-supported childcare, the employee must receive some financial support at least once in any 52-week period.
Ensure that if support is given up or withdrawn e.g. during maternity leave, the employee restarts it within the 52-week window.
Employees who are able to continue with employer-supported childcare because they were receiving it before 4 October may in the future decide that TFC is better for them. When they sign up for TFC, they’re warned that they must tell their employer within 90 days that they have taken this alternative support. On receipt of this notice, which must be in writing, you must stop employer-provided childcare and if this has been provided through salary sacrifice a new contract will be drawn up. Failure to tell the employer within 90 days means that the employee is committing fraud by receiving two types of childcare support simultaneously.
If the employee decides to open a TFC account, they are only eligible if neither parent is in an employer scheme. It’s not possible, for example, for the mother to join TFC whilst the father claims childcare vouchers.
Options from 4 October
If you want to offer childcare support to new joiners after 3 October 2018, there are choices:
- Offer vouchers/directly contracted childcare on top of salary. This will be a benefit in kind reported for tax on the employee’s P11D but subject to NI in the pay period when the support is provided.
- Allow employees to purchase childcare support through a net pay deduction. This would not be a benefit in kind. This could be attractive if you’re able to negotiate better rates for childcare on a bulk basis than an individual could do.
- Deduct money through net pay and pay that directly into the employee’s TFC account;
- Pay money directly into the employee’s TFC account – this would be counted as earnings and subject to tax and NI. This does not mean that everybody is a new joiner, it’s simply a commercial decision and doesn’t affect the tax exemption.
As you start to see your childcare voucher population dropping as people leave, or children reach 16, consider dispensing with a third-party provider. You can simply provide vouchers yourself, which the employee’s chosen childcare provider can simply remit to you for payment.
Any other considerations?
The government also offers free childcare which varies across the United Kingdom but has no impact on employer-supported childcare. An employee can choose to accept free childcare and continue in an employer scheme. The rules on free childcare in each country are: England and Wales 30 hours per week; Scotland 600 hours per year; Northern Ireland 12.5 hours per week.
For any further information in regards to this article please do not hesitate to contact our HR Consultants on 0161 926 8519 alternatively they can be contacted via email, Alison.firstname.lastname@example.org or Amrita.Govindji@thespectragroup.co.uk