This is a form of salary sacrifice which can bring benefits to the employer and employee but there are some pros and cons. Careful consideration needs to be given before putting it into place.
- The employee can sacrifice part of their salary in return for vouchers. The deduction is made before tax and National Insurance so this portion of the salary is received, in effect, tax free. The current maximum ‘spend' on vouchers for basic rate taxpayers is £55 per week which is a potential saving of £933 a year.
- The employer is exempt from paying National Insurance Contributions on this portion of the employee's salary. It is estimated that if just one employee received the maximum amount of vouchers the employer could save up to £403 a year.
- The vouchers have a long expiry date and are not specific to a particular child. Many can also be backdated, for up to 6 months, which means an employee can ‘save up' the vouchers for use, for example, during school holidays when childcare costs may rise.
- The childcare provider must be registered for the scheme and includes the usual categories of nurseries, crèches and pre-schools but also includes nannies, au-pairs and child-minders. The take-up rate amongst employees is therefore likely to be high.
- The rules of the scheme are fairly complex. There are many commercial providers who will administer the scheme on your behalf but the employer will remain ultimately responsible to HMRC.
- Childcare vouchers cannot be used if, having made a salary sacrifice, the employee's salary falls below the National Minimum Wage.
- If the net salary is used for things like mortgages the employee may have to consider the impact of the sacrifices.
- Childcare vouchers affect an employee's eligibility to Tax Credits which are assessed by the amount of cash paid for childcare.
- HMRC requires employers to perform a Basic Earnings Assessment at the start of the scheme and annually thereafter. The employer has to estimate the employees' earnings for the year taking into account various factors. It cannot be done retrospectively. The employer is also bound by HMRC's statutory record-keeping obligations to retain copies of the calculations.
- If any of the statutory conditions of the scheme are not met, HMRC can declare the scheme void. In this scenario all employees in the scheme would lose their tax relief for the year and the employer would have to pay the National Insurance Contributions owed for that year.
- The childcare vouchers must continue to be paid during maternity or any parental leave. This is because employers must continue to provide all contractual non-cash benefits. During this period, however, the employer cannot set-off the vouchers against maternity or parental pay, as statutory payments must be paid in full. This has the effect of costing the employer the value of the vouchers during any period of maternity/parental leave.
Pam Loch, Managing Partner of niche employment law practice, Loch Associates Employment Lawyers and Managing Director of HR Advise Me Limited.
For more information on Loch Associates Employment Lawyers please go to www.lochassociates.co.uk and for HR Advise Me go to www.hradvise.me.