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Many organisations are now offering their employees salary sacrifice schemes. The idea behind this is quite simple. You give up part of your salary and, in return, your employer gives you a non-cash benefit that is ideally exempt from tax and National Insurance.
As with other salary sacrifice benefits, Childcare Vouchers are offered by employers to employees in exchange for a part of their gross salary.
As well as enabling working parents to afford childcare, this perk can also offer significant tax and national insurance (NI) savings for employees and employers. The amount an employee can receive in vouchers without having to pay tax or national insurance contributions (NICs) will depend on when they joined their employer’s scheme and on the level of pay they receive.
The Government has announced plans to replace the existing childcare voucher scheme from Autumn 2015 with a tax-free childcare scheme. At launch, the scheme will include children up to the age of five but by September 2016 those up to the age of 12, or 16 if they have disabilities, will be covered. The existing employer-supported childcare scheme will be phased out once its new tax-free childcare package has been introduced.
Schemes already operating will be allowed to continue and parents already enrolled in them will be able to continue to use them until their children reaches 15 years old. No new schemes will be allowed to be opened and employees will have to stop using the existing scheme if they wish to claim the tax-free childcare support. Employees will be unable to continue using the current childcare vouchers if they move from one employer offering the scheme to another.
Employees will continue to be able to join workplace nursery schemes offered by their employers and parents will be able to access a workplace nursery and receive tax-free childcare (for example, if the child attends qualifying childcare outside of the time that they are in the workplace nursery).
How will the new scheme work?
The scheme allows working parents to in effect obtain childcare subsidies directly online, rather than through employers. Working parents will need to sign up to a website which will be run by National Savings and Investments in partnership with HMRC where they will be able to buy vouchers online to pay for childcare. Working parents will then pay money into an account for childcare. For every 80p parents spend, the Government will add 20p. The scheme is available for up to £10,000 of childcare costs per child each year and there is no limit on how many children can be claimed for.
The scheme will work in quarterly entitlement periods. One parent will need to make the claim but if they are part of a couple, they will also need to give details of their partner's income.
Who is eligible?
Working parents earning more than £50 a week, but not over £150,000 a year each, will qualify whether they are employed or self-employed. Both parents need to be working to be eligible for the scheme, the exception being if one is a carer in receipt of carer's allowance.
Parents who are on maternity, paternity, adoption or long term sick leave will still be able to benefit from the scheme too, as long as they qualified to do so before their leave began. Parents who are starting a business, even if their earnings are under £50 a week initially will also be eligible.
Eligible childcare providers
All childcare providers and facilities must be OFSTED registered and HMRC must be notified of the schemes.
To find out more about the new tax-free childcare scheme and how it effects your existing Salary Sacrifice Schemes please feel free to contact us on 01892 773970.
Pam Loch, Managing Partner of niche employment law practice, Loch Associates Employment Lawyers and Managing Director of HR Advise Me Limited.
A practical book explaining the highly regulated framework governing the rights of working parents