It has now been a year since the Government originally confirmed plans for a Tax-Free Childcare scheme (TFC), which will see the gradual phasing-out of the current Childcare Voucher schemes, which will close to new entrants from April 2018. Due to the popularity of the Childcare Voucher schemes as an employee benefit, we thought it would be appropriate to outline some of the key changes that will be taking place over the next year, and how these will affect your working parent employees.
Childcare Voucher schemes have been a popular employee benefit ever since they were first introduced in 1989, representing value-for-money and financial flexibility for thousands of working parents.
Under current regulations, parents who select a Childcare Voucher scheme are entitled to a maximum of £243 of vouchers per month for children up to the age of 15, which is taken from pre-tax and pre-NI income (Salary Sacrifice). For a basic rate taxpayer, this represents a maximum annual saving of £933 on childcare costs.
However, since the announcement of Government plans for a new Tax-Free Childcare scheme (TFC) in March 2016, there has been a degree of uncertainty over the future of Childcare Voucher schemes, until the March 2017 Spring Budget.
In the Spring Budget, Chancellor Philip Hammond confirmed that the Government’s TFC scheme will be introduced from 28 April 2017, and that all eligible parents are to be brought into the scheme by the end of 2017.
He stated: “Next month we will see the introduction of our flagship tax-free childcare policy, which will allow working families across the UK to receive up to £2,000 a year towards the cost of childcare for each child under 12.
And from September, working parents with three and four year olds will get their free childcare entitlement doubled to 30 hours a week. That’s worth around £5,000 a year to a young family with a three year old and both parents working.
By the end of this parliament, government spending on childcare will have reached £6 billion a year.”
WHAT DOES THIS MEAN?
Despite the confirmation of the Government’s roll-out of its new TFC scheme from 28 April 2017, there was no specific mention on the fulfilment model of the new TFC scheme in the Spring Budget. However, the Government has already announced plans to stop new joiners enrolling in their employer sponsored Childcare Voucher scheme from April 2018. The employer sponsored scheme will continue to run for any employees who join before this date.
Effectively, until April 2018, parents will be able to choose between the Government’s TFC scheme and existing Employer sponsored Childcare Voucher schemes depending on which is more cost effective, although it is important to note that employees cannot benefit from both simultaneously.
HOW DOES THE TFC SCHEME COMPARE TO THE CHILDCARE VOUCHER SCHEMES?
The financial basis for the new TFC scheme is that for every 80p an employee pays into their TFC account on childcare; the Government will top this up with another 20p to a limit of £2,000 per child, per year (£4,000 for disabled children). Children up to 12 years of age will be covered (16 years if the child is disabled), and parents will be able to manage their TFC savings via an online account via a (yet to be determined) government website.
However, the first thing to note about the Government’s new TFC scheme is that it is a lot more selective than the existing Childcare Voucher schemes.
For example, to qualify for the TFC scheme both parents will need to be working (unless they are a single parent), both earning less than £100,000 per annum, working a minimum of 16 hours per week, and not receiving tax credit support.
There will be benefits and disadvantages under both schemes, so it is important that employees review their financial situation, and choose the scheme that is most financially beneficial for them before Childcare Voucher schemes close to new joiners in April 2018.
REAL WORLD SCENARIOS*
The table below shows a variety of examples where parents can either be Full-time, Part-time, Self Employed or a Single Parent. All scenarios show that either the Employer Sponsored Childcare or TFC (Tax-Free Childcare) would be more financially beneficial depending on the working parent’s current circumstances. Considerations on these values should be considered by all working parents before April 2018, as after this date only the Government Tax Free Childcare option will be available.
TO BE CONTINUED…
As and when further announcements are made by the Government regarding the new TFC scheme we will continue to update you on this important subject.
For further information please get in touch with your usual JLT Consultant, or contact
Nick Patel, Senior Consultant | T: 07826 536 932 | E: firstname.lastname@example.org