Childcare – Which scheme is best for you?

In the Budget 2013, it was announced that a new childcare voucher scheme, Tax-Free Childcare, would be introduced to be phased in from Autumn 2015. However due to legal challenges which were raised against the new scheme by organisations under the existing Employer Supported Childcare Scheme (ESC) who were to be adversely impacted by the new scheme’s introduction, the start date was pushed back to ‘early 2017’. Despite the legal proceedings which took place, the Supreme Court dismissed the case.

The childcare scheme changes will not only have an impact on employees, but also on employers who operate the existing scheme via salary exchange.

What are the arrangements currently in place?

Currently under the ESC scheme, individuals can have up to £243 per month deducted from their gross pay and converted into childcare vouchers to then be used at one of the many registered childcare organisations. For the employee, this attracts income tax relief at source, and National Insurance if operated via salary exchange and is therefore a very appealing arrangement to those facing childcare costs. The employer will also benefit from national insurance relief at source when salary exchange is operated and as a result, we see the scheme widely offered in the workplace.

How will the new scheme work?

Under the new scheme, Tax-Free Childcare, which will be operated by HMRC and National Savings & Investments (NS&I) together, eligible individuals are invited to open an account where they can deposit up to £10,000 a year to cover their childcare costs. Payments into the account will then be topped up at 20% by the government. This therefore means that individuals can benefit from up to £2,000 of free money to use on childcare each year.

As under the current scheme, only registered childcare organisations will be able to receive payments under the Tax-Free Childcare scheme. To help parents with managing their childcare, HMRC will offer an online digital system where accounts can be viewed and registered providers can be searched for.

There will also be no involvement for employers under the new scheme.

Who is eligible to join the new scheme?

The new scheme will be available to all working families where each partner earns less than £100,000 a year. This limit was originally set at £150,000, but, it was reduced down at the Autumn Statement 2015 to be in line with the personal allowance taper limit. In addition to this, each partner must be in work and earn at least the equivalent of 16 hours at the National Living Wage per week.

It is important to note that this scheme is also available to lone parents providing they are in employment and are not an additional rate taxpayer. Any individual whether that be a lone parent or a partner in a couple will not be eligible for the scheme if they are in receipt of any tax credits, Universal credit or if they are already in the ESC scheme.

For families where one or both parents are off work but are being paid parental or sick pay, providing they remain in employment and continue to receive income, their entitlement to receive support through the Tax-Free Childcare scheme can continue.

In comparison to the existing scheme which conditions make it widely accessible to parents, these are considerable burdens and widely restrict those who are eligible to take part in the new scheme.  We have summarised the requirements of each scheme below:

	Employer Supported Childcare (ESC) – Current	Tax Free Childcare – Future
Who can apply?	Only those whose employer offers the scheme	Anyone – employed/self-employed
What are the earnings requirements?	No minimum earnings	Both partners must earn at least 16 hours at National Minimum Wage each week
What children qualify?	Up to age 15 or 16 if they have a disability	Up to age 12 or 17 if they have a disability
What is the earnings limits?	No income limit	Each partner must earn less than £100,000
What are the work requirements?	Only 1 partner must be in employment	Both partners must be in employment or if a lone parent family the lone parent must be in employment

 

When will individuals be able to sign up for the new scheme?

The actual start date of the scheme is still to be announced and we are told it will be ‘early 2017’, however we do know that it will be phased in gradually before being available to everyone by the end of 2017. The first people who will be invited to join the scheme are parents of children under 5 and parents with disabled children under 17. Following this trial, the scheme will be open to all eligible individuals by the end of 2017.

What will my role be as an employer?

Employers do not have a specific role in the Tax-Free Childcare scheme, however they can choose to support their employees during the transition. This may be by providing details of how to sign up and how the scheme works to employees.

Some employers may also want to offer a service to employees where they can make payments into their childcare account from their net pay each month. This would not attract any tax or national insurance benefits to either party however it would make the process of making payment easier for the employee as they will not need to manually transfer the funds themselves.

As under current rules, employers can assist their employees by paying additional childcare support to them, however this constitutes a benefit in kind and is therefore subject to income tax and national insurance.

It is important to note that the provision of a workplace nursery or crèche will not be impacted by the new rules and this can continue to be offered to employees with no income tax or national insurance implications.

When will the old scheme stop?

Employees are welcomed to continue to sign up for the ESC scheme until April 2018. Those who have joined the scheme before this date will be entitled to remain under it for the duration that their employer offers it or until their last child becomes ineligible.

Given the National Insurance savings available to employers under the existing scheme where salary exchange is operated, we would not only expect to see those who already offer the scheme to encourage their employees to sign up, we would recommend that those who do not already offer the scheme to implement it as soon as possible. Communicating this to employees is vital to ensure they are aware that the scheme is offered, when they can sign up and the savings available to them – the more employees signed up, the bigger National Insurance savings for employers!

Likewise, we would encourage employees to sign up if their employer offers the scheme to take advantage of the income tax savings and National Insurance savings where salary exchange is used. Remember the scheme can be entered by both parents as soon as the baby is born!

If you have any queries surrounding the new scheme or as an employer would like more information on your position and how to make the most of the existing arrangements, please don’t hesitate to get in touch.