Easy as 1,2,3 - the surprise extension of employer-supported childcare voucher scheme
The planned phase-out of the ‘employer-supported childcare’ voucher scheme, due to take place in April 2018, has been shelved until 4 October 2018. Justine Riccomini explores the reasons why this has happened and considers whether employers and parents will simply be confused.
Employer supported childcare, a concept introduced 13 years ago on 6 April 2005, which was based on a voucher purchasing system, was due to be closed down to new entrants this April. Natural wastage would ensure the scheme would eventually be phased out for those parents already participating. Due to the tax exemptions available, the childcare voucher scheme proved popular, with around half a million parents taking advantage of it through their employer each year. Most employers also managed to save a little NICs by offering the vouchers as a salary sacrifice item. Childcare voucher providers popped up throughout the UK and employee benefits providers counted them as a staple amongst their suite of offerings to employers as part of total reward schemes.
A new Government-backed scheme, known as “tax-free childcare”, was due to be launched in 2018 and would, for the first time, open up a childcare scheme to the self-employed. Parents who earned over £120 per week (£6,240 p.a.) but less than £1,923 per week (£100K p.a.) would be eligible to participate. The Government would contribute a top-up of 20p for every 80p funded by parents, which would translate into a maximum of £2,000 of funding per annum, and double that if the child is disabled.
The Government is looking to maintain that only one scheme is running at a time. The new scheme is heralded as preferable to the old one because it is controlled by the parent via the digital account and is available to both employed and self-employed, something which the self-employed have been fighting for since 2005.
However, the new scheme has encountered several teething issues via the HMRC online service – resulting in thousands of parents being denied access to tax-free childcare accounts or unable to obtain access the money they had paid into them. It is understood that compensation in the region of £40,000 has been paid out so far.
On 13 March 2018, the Government had to extend the old scheme by 6 months to 4 October 2018 after a vote in the House of Commons forced a temporary reprieve. It appears the DUP was amongst some of the strongest ministerial opposition to bringing the scheme to a close due to difficulties around the affordability of the new scheme in Northern Ireland. The existing employer-supported childcare scheme will, therefore, remain open to new entrants for another six months. The relevant announcement can be found here and is enacted by way of SI 2018/450 – the Income Tax (Limited Exemptions for Qualifying Childcare Vouchers and other Childcare) (Relevant Day) Regulations 2018.
The CIPD recently reported that around a third of HR managers had actually not been aware of the changes to the childcare scheme as of last October – which might lead one to suppose that the awareness campaign run by the Government was not particularly successful. HMRC recently issued a statement via its Childcare Choices website explaining the changes.
In the meantime, those HR managers who were aware have been busy preparing for the closure of the scheme to new entrants and moving to the new tax-free childcare system. This means there will be different employees on different schemes, leading to complexity, additional administrative burdens and, no doubt, confusion in some cases.
It is not yet clear that the new ‘tax-free’ child care system is advantageous to employees when compared to the old voucher scheme. Employees might be forced to pay up front for childcare because they have to top up the digital account in advance of it being used when in the past they have paid it retrospectively or on an “as you go” basis, which may lead to cash flow problems and rising debt in cash-strapped young families. One of the key benefits to the extension of the scheme is that new entrants can still join the old scheme. It is therefore vital that employers and employees consider whether childcare vouchers or tax-free childcare is appropriate for them before October 2018.