There are currently two different forms of childcare vouchers: employer supported scheme and Government supported scheme.
Current Employer Supported Scheme
Employer-supported childcare vouchers are provided by employers and are aimed at helping parents to make some savings when it comes to quality childcare. This form of tax relief is available to employed parents, regardless of income. However please note:
- Childcare vouchers can only be used to pay for Ofsted-regulated childcare
- To be able to use childcare vouchers you need to be employed and your employer needs to have set up a childcare voucher scheme in your benefit
- If you are self-employed you are currently not able to benefit from childcare vouchers (please see below)
- From 2018, no new applicants to any employer supported childcare voucher scheme will be permitted.
Childcare vouchers work through a system called “salary sacrifice”, which means that you receive childcare vouchers instead of your salary but you don’t have to pay any tax or national insurance contributions on the amount you receive in childcare vouchers. Be aware that opting to receive childcare vouchers can have an impact on other elements of your finances such as pension contributions or maternity pay which are calculated on the basis of how much you earn. Receiving childcare vouchers may also reduce your eligibility for tax credits as the amount of tax credit you receive depends on how much you pay in cash for childcare. If you can’t claim tax credits, then you will be better off if you can receive vouchers.
Basic rate tax payers can receive up to £930 of childcare vouchers per year. This is PER PARENT so two working parents could get £1860 a year of vouchers to use to pay for childcare.
New joiners paying higher or top rate tax had their allowance dropped from April 2011 so that all tax payers have roughly the same maximum tax gain. The new limits for higher or top rate tax payers are:
- Higher (40%) Taxpayer. £28/week voucher, max annual gain £630
- Top Rate (45%) Taxpayer. £25/week voucher, max annual gain £590
- If you are self-employed you are not currently able to benefit from childcare vouchers
There’s a special calculator on the HM Revenue & Customs site (https://www.hmrc.gov.uk/calcs/ccin.htm) which will calculate if you’re better or worse off taking the vouchers.
The number of children you have doesn’t impact this, the limits are the same whether you’ve one child or several. Vouchers aren’t specific to each child and have a long expiry date, so if you know you’re going to have higher childcare costs in the near future get the maximum allowance now. Also many providers will let you backdate vouchers up to six months, although your child must be born for you to be able to sign up. Check your individual provider’s procedures first.
Government Supported Childcare Voucher System
From 2017, parents are able to access an online voucher system to enable them to cover the cost of childcare up a value of £1,200 per year per child (the scheme assumes a maximum of £6,000/year of childcare costs per child). Initially only children under the age of 5 will benefit but thereafter it will cover households with children under the age of 12. Vouchers can be used for any Ofsted-regulated childcare in England and equivalent in Wales, Scotland and Northern Ireland. To be eligible, both parents have to be working at least 16 hours a week and each must be earning under £100,000. This includes anyone who is self-employed. Those on tax credits will not be eligible. The existing employer supported childcare voucher scheme will still continue but will be closed to new applicants from 2017 onwards.
It is advised that as many higher rate taxpayers may be worse off under the new Government funded childcare voucher scheme, such parents should register as soon as they can with their employer supported childcare voucher scheme if their employer provides one.
For further comparisons and information on the differences between the employer supported and the Government support childcare voucher scheme, please see our blog here.
Childcare Vouchers and Your Childcare
You can use childcare vouchers to pay for any regulated and registered nursery, playgroup, child-minder or nanny. You can also use your vouchers for tuition but that tutor must be Ofsted registered. The vouchers cover childcare up to 1 September after your child’s 15th birthday (16th if they are disabled).
Childcare Vouchers and Your Nanny
As regards using childcare vouchers to pay your nanny, your nanny’s salary will not change when you start using vouchers; neither will the amount of Income Tax and National Insurance contributions you (the employer) pay on their behalf. You will, however, be able to save money on your own Income Tax and National Insurance payments; i.e. in some cases as much as £1 – 2,000 per family per year.
Paper vouchers and electronic vouchers are the two types of childcare vouchers available. Your employer will use either one or the other. The vouchers are issued directly to you from your employer. If electronic vouchers are used the value of these will be deposited into a virtual account which is held with the voucher provider. If paper vouchers are used these will be either handed directly to you, or sent in the post.
If your nanny is not already registered with a childcare voucher company a welcome pack will be sent to you with a registration form for nanny to fill in. Under the new Ofsted register your nanny is required to provide the voucher company with a copy of their registration number when they register. If paper vouchers have already been issued these need to be included when nanny sends in the registration form.
Once the voucher company has received the registration form they will issue your nanny with a unique service provider number. If electronic vouchers are used you need to authorize the transfer of the value of the vouchers from their virtual account into one that has been set up for your nanny. Once the childcare voucher provider has received confirmation of transfer they will issue payment to the value of the vouchers.
Nanny has the option of being paid either by BACS or by cheque. It will take approximately three days for the BACS payment to clear into their bank account. As their employer you may wish to consider moving nanny’s payday to offset any possible delays.
Where to get Employer Supported Childcare Vouchers from:
Computer Share vouchers: www.computersharevoucherservices.com
Employers for Childcare: https://vouchers.employersforchildcare.org/