Childcare / Nursery Vouchers for Employers

Staff Retention & Recruitment

Quality and affordable childcare is important to employers and employees alike. With parents now representing almost 40% of the UK workforce, employers that offer childcare support to their employees will see many benefits. Employers can support working parents by subsidising childcare costs in addition to providing workplace nurseries or by offering flexible working options and information on childcare choices.

What are childcare vouchers?

Childcare vouchers are one of the ways in which employers can assist their employees with the costs of childcare. From 6 April 2005 childcare vouchers (up to a limit of £50 a week, or £217 a month) are exempt from National Insurance Contributions (NIC) for employers, and from tax and NICs for employees - employers therefore reduce some of their business costs and employees make savings on their childcare costs. If you decide to enter into a Childcare Voucher scheme, you have to make it generally available to all employees where the scheme operates. The tax and NICs exemptions apply to benefits an employer gives to an employee, therefore unemployed and self-employed parents are not eligible. Each employed parent may claim the exemption.

NB: Employers can support the childcare needs of their staff in ways other than setting up a voucher system. They can also directly contract a childcare provider on their employee's behalf. The tax and NICs exemptions apply in the same way for the first £50 a week provided.

How does a childcare voucher scheme work?

An employer will normally contract a childcare voucher company to provide vouchers to their staff (see end of document for a list of childcare voucher companies). Childcare vouchers can be offered as a benefit-in-kind on top of existing pay, as part of a flexible benefits package or most commonly as part of a salary sacrifice scheme. The voucher company will normally provide the employer with childcare vouchers, which they can then distribute to staff accordingly, though some may post vouchers directly to the employee's home. Those employees can use the vouchers to 'pay' their childcare provider. The childcare provider will then redeem the value of the voucher directly from the childcare voucher company. Payment to the childcare provider is usually made by direct payment into their bank account. The employer will negotiate a management fee to the voucher company for their service, however usually the savings made on NICs more than cover the cost of this fee.

What is salary sacrifice?

Salary sacrifice means that an employee formally agrees to a reduction to their taxable salary and instead receives that amount (equivalent to the reduction) in childcare vouchers. The value of the childcare vouchers is exempt from NICs for both employer and employee, and from tax for the employee. This means NIC savings of up to 12.8% for employers and up to 11% for employees, plus the savings employees make on not paying tax. The contract between employer and employee must be updated and a signed agreement incorporated to reflect the changes agreed within the salary sacrifice.

How will we benefit as an employer by offering childcare vouchers?

Employers who provide support for their staff through childcare vouchers benefit in a number of ways including:

NIC savings of up to 12.8% - around £300 a year.
Tax and NIC savings for employees - helping them with childcare costs.
Demonstrates commitment to your staff and enhances your company image
Improves staff motivation and morale, therefore increasing productivity
Improves staff recruitment and retention
Reduced absenteeism

What sort of childcare can they be used to pay for?

Childcare vouchers can be used to pay for any form of legal childcare, but the first £50 a week you receive in vouchers will only be tax and NICs exempt if it is used to pay for registered* or approved childcare. This can include:

Childminders, nurseries and playschemes registered by Ofsted.
Out of hours clubs run by a school on the school premises or by a local authority.
Childcare schemes run by approved providers.
An approved foster-carer (the care must be for a child who is not the foster carer's foster child)
In England only, a childcarer who is approved by Ofsted to care for your child or children in your own home - these are childminders who have further qualified to become "home childcarers".
In England only, a childcarer approved under the Childcare Approval Scheme (see end of document for information about the new Childcare Approval Scheme which will operate from April 2005).
In England only, childcare given in the child's own home by a domiciliary worker or nurse from a registered agency.
In Scotland only, childcare given in the child's own home by (or introduced through) childcare agencies, including sitter services and nanny agencies, which must be registered.

"NB: Childcare provided by a relative**of the child is generally not eligible for help via the childcare element of the Working Tax credit or the tax and NICs exemptions on employer-supported childcare. The sole exception to this is the situation in which a relative has been registered or approved as a child-carer, and happens to care for a related child, but whose primary or main paid child-caring is for children to whom they are not related . In short being a paid child-carer for the child to whom they are related is INCIDENTAL to their usual paid child-caring. This care must be provided outside the child's own home."

* childcare services which have been registered and inspected by Ofsted (England only), the Care Standards Inspectorate for Wales, the Scottish Commission for the Regulation of Care and the Health and Social Services Trust in Northern Ireland.

**A relative of the child means a parent, grandparent, aunt, uncle, brother or sister --whether by blood, half blood, marriage, or affinity.

Can all childcare providers accept childcare vouchers?

Yes, as long as the provider has a bank account. In order to receive the reimbursed value of a childcare voucher, childcare providers will need to register their details with the childcare voucher company. This is usually a record of contact details, registration number where appropriate, and bank account details if the voucher company intend to make payments directly into the back account of the carer. There is no cost to the childcare provider in receiving payment through childcare vouchers. Information packs that explain the voucher processes for childcare providers are available from most voucher companies.

How much will it cost?

The only cost to an employer who signs up to a childcare voucher scheme is the management fee to the voucher company. These vary and are often negotiable with the voucher company. Some may charge a set rate whilst others may charge a percentage (usually about 5 per cent) of the overall value of childcare vouchers requested by an employer. However the savings a company makes in terms of reduced NICs usually exceeds the management fee charged by the voucher company.

Will it involve extra work for our organisation?

There is minimal administration for an employer when operating a childcare voucher scheme. In general, voucher companies can be responsible for most of or all of the administration involved, though you can often negotiate what you would like them to be responsible for and what elements you are happy to administer in house. This will obviously affect the fee charged by the voucher company. It is important to involve different staff groups including management team, HR staff, payroll managers and administrators, employee or union representatives in this planning process to ensure that the arrangements and responsibilities that you agree to are realistic and will be the most efficient for you as an employer. In the case of Salary Sacrifice it is important that a clear contractual change takes place between employer and employee.

What about workplace nurseries - do they qualify for the same NICs breaks?

If schemes meet the criteria for workplace nurseries (for information about the criteria, look at page 5 of this booklet on the Inland Revenue's website: www.inlandrevenue.gov.uk/helpsheets/e18.pdf ), they qualify for full tax and NICs exemptions.

For more information from the Inland Revenue about all the ways in which employers can help employees with childcare costs, go to: www.inlandrevenue.gov.uk/helpsheets/e18.pdf

What should you be aware of:

Childcare vouchers are a great incentive for your employees, but before staff commit to entering a childcare voucher scheme involving salary sacrifice, it is important to make them aware of all the features of salary sacrifice and how it might affect their overall financial position. In most instances the benefits of childcare vouchers are likely to outweigh any negative effects, but employees must be able to make an informed decision based on their own circumstances.

Period of contract:

When an employee agrees to sacrifice part of their salary for childcare vouchers the contract of employment will need to be amended or an additional contractual agreement will need to be signed. This agreement will usually be for a set period of time, usually for one year, after which the agreement can be reviewed. The employee does not have an automatic right to revert back to their original salary within the contractual period. Many employers and schemes will however, offer an earlier review of the agreement in the event of "unexpected life changes", which is anything linked to birth, death and marriage. In other extreme circumstances you as the employer can ask your local Tax Office if your employee may leave the scheme. Employers should be clear on what change in circumstances they might consider and can discuss this in more detail with a childcare voucher company.

Terms and conditions of employment:

Adverse effects from using salary sacrifice can arise because many other employer-provided benefits are calculated on the basic salary, for example, overtime, sick pay, shift allowances, on-call time, uniform allowances and employer's maternity pay. Best practice is to maintain the link with the full or "notional" salary value, allowing employers to ensure that any salary based enhancements are based on the salary before the sacrifice. It is good practice for employers to protect the benefits they provide.

Effects of Salary Sacrifice on work-related benefits:

The amount employees receive in childcare vouchers will not count as part of work-related payments such as Statutory Maternity Pay (SMP) and Statutory Sick Pay (SSP), which are based on an employee's average earnings over a fixed period. As pregnancy is a "life-changing event" it should be possible to review the employee's amended contractual arrangements (which permitted the original salary sacrifice) and (if she wants to) she should be able to leave the scheme before working the eight weeks period on which her SMP will be based and thus ensure it will not be affected.

Effects of Salary Sacrifice on contribution- and earnings-related benefits

Contribution-based benefits are calculated according to the level of National Insurance Contributions (NIC) paid by an individual. An individual's eligibility for contribution-based benefits may be affected by their participation in a childcare voucher salary sacrifice scheme, as their NICs will decrease. Examples of some benefits that may be affected include Jobseekers' Allowance, Incapacity Benefit and the State Pension. Earnings-related benefits such as Maternity Allowance and the State Second Pension are based on an individual's income and do not take into account the amount received in childcare vouchers as income, therefore reducing the rate of these benefits.

More information on the effects of childcare vouchers schemes and salary sacrifice may have on employees' work-related payments and benefits is available on line from the Inland Revenue - www.inlandrevenue.gov.uk

Effects on Child Tax Credit and Working Tax Credit:

The Child Tax Credit (CTC) offers financial support with general family costs. Working Tax Credit (WTC) supports those on lower incomes and working parents may be eligible for additional help towards registered childcare costs. The amount of help parents receive will depend on a number of factors including their income, the size of their family and the amount they pay in childcare. The receipt of childcare vouchers through a salary sacrifice scheme can affect parents' entitlements to these tax credits in two main ways. Where employees' average earnings have effectively been reduced, they could receive a higher payment through the WTC. However, the value received in childcare vouchers from an employer, cannot be considered as childcare costs when calculations are made for their entitlement to the childcare element of WTC. (Essentially because you cannot claim twice for the same benefit). The childcare element of WTC may therefore be reduced. It is advisable for parents to find out what level of support they could be entitled to through the CTC and WTC before they sign up to a childcare voucher salary sacrifice scheme. In some instances parents may be financially better off opting to receive help through the WTC rather than through their employer's childcare voucher scheme.

For more information on Child Tax Credit and Working Tax Credit contact the Tax Credit helpline on 0845 300 3900 or visit www.taxcredits.inlandrevenue.gov.uk

How can I tell whether an employee would be better off with Tax Credits, or with a voucher scheme?

The following bullet points provide a rough guide as to whether someone would get more help from Tax Credits, or from employer-supported childcare, but each individual situation should be checked carefully before deciding which benefit is better for an employee.

Employees will always benefit from taking a tax and NICs-free voucher if it is offered on top of their salary.
Generally, if employees are getting £545 or less a year in total from Tax Credits, they will be better off using vouchers.
Generally, if an employee is getting more than £545 a year in total from Tax Credits, they will not gain from claiming the tax and NICs exemptions - unless they are a higher rate tax payer.

How much can employees receive in vouchers?

There is no limit on the amount you can give employees in vouchers - however only the first £50 qualifies for NICs exemptions for employers, and tax and NICs exemptions for employees. The only legal consideration is (if you operate Salary Sacrifice) that the employee's cash pay must not fall below the minimum wage.

Childcare Approval Scheme

This is a new scheme for approving forms of childcare not previously able to be registered (and thus not able to qualify for help through Tax Credits, and for tax and NICs breaks on employer-supported childcare). This scheme enables carers caring for a child in the child's own home (such as nannies), or caring for children over 7 on other domestic premises (such as childminders) to become "approved" by showing that they have certain qualifications. The scheme is voluntary. Childcarers can apply for approval from 4 January 2005, although no approval will be effective before 6 April 2005, when the scheme starts. For more information about the Childcare Approval Scheme, ring the helpline: 0845 7678 111 or visit: www.childcareapprovalscheme.co.uk

From 6 April 2005 there are three key changes in the administration of Childcare Vouchers

If you have a voucher system, the scheme must be generally available to all employees where the scheme applies (before 6 April 2005 employers could supply vouchers to sections of the workforce in a workplace).
The first £50 supplied in Childcare Vouchers is free from tax, as well as National Insurance Contributions (NICs) for the employee, and free from NICs for the employer (before 6/04/05 an unlimited amount supplied in Childcare Vouchers was free from NICs for both employers and employees, but not from tax).
Vouchers can be used to pay for all forms of legal childcare, but after 6 April 2005 will not qualify for the tax and NICs exemptions on the first £50 supplied unless they are used to pay for registered or approved childcare (before 6/04/05 childcare vouchers qualified for NICs exemptions when they were used to to pay for any form of legal childcare).

Note: This information was taken from Childcare Vouchers for Employers - Daycare Trust factsheet on childcare vouchers

VOUCHER PROVIDERS Childcare / Nursery Vouchers for Employers Staff Retention & Recruitment Quality and affordable childcare is important to employers and employees alike. With parents now representing almost 40% of the UK workforce, employers that offer childcare support to their employees will see many benefits. Employers can support working parents by subsidising childcare costs in addition to providing workplace nurseries or by offering flexible working options and information on childcare choices. What are childcare vouchers? Childcare vouchers are one of the ways in which employers can assist their employees with the costs of childcare. From 6 April 2005 childcare vouchers (up to a limit of £50 a week, or £217 a month) are exempt from National Insurance Contributions (NIC) for employers, and from tax and NICs for employees - employers therefore reduce some of their business costs and employees make savings on their childcare costs. If you decide to enter into a Childcare Voucher scheme, you have to make it generally available to all employees where the scheme operates. The tax and NICs exemptions apply to benefits an employer gives to an employee, therefore unemployed and self-employed parents are not eligible. Each employed parent may claim the exemption. NB: Employers can support the childcare needs of their staff in ways other than setting up a voucher system. They can also directly contract a childcare provider on their employee's behalf. The tax and NICs exemptions apply in the same way for the first £50 a week provided. How does a childcare voucher scheme work? An employer will normally contract a childcare voucher company to provide vouchers to their staff (see end of document for a list of childcare voucher companies). Childcare vouchers can be offered as a benefit-in-kind on top of existing pay, as part of a flexible benefits package or most commonly as part of a salary sacrifice scheme. The voucher company will normally provide the employer with childcare vouchers, which they can then distribute to staff accordingly, though some may post vouchers directly to the employee's home. Those employees can use the vouchers to 'pay' their childcare provider. The childcare provider will then redeem the value of the voucher directly from the childcare voucher company. Payment to the childcare provider is usually made by direct payment into their bank account. The employer will negotiate a management fee to the voucher company for their service, however usually the savings made on NICs more than cover the cost of this fee. What is salary sacrifice? Salary sacrifice means that an employee formally agrees to a reduction to their taxable salary and instead receives that amount (equivalent to the reduction) in childcare vouchers. The value of the childcare vouchers is exempt from NICs for both employer and employee, and from tax for the employee. This means NIC savings of up to 12.8% for employers and up to 11% for employees, plus the savings employees make on not paying tax. The contract between employer and employee must be updated and a signed agreement incorporated to reflect the changes agreed within the salary sacrifice. How will we benefit as an employer by offering childcare vouchers? Employers who provide support for their staff through childcare vouchers benefit in a number of ways including: NIC savings of up to 12.8% - around £300 a year. Tax and NIC savings for employees - helping them with childcare costs. Demonstrates commitment to your staff and enhances your company image Improves staff motivation and morale, therefore increasing productivity Improves staff recruitment and retention Reduced absenteeism What sort of childcare can they be used to pay for? Childcare vouchers can be used to pay for any form of legal childcare, but the first £50 a week you receive in vouchers will only be tax and NICs exempt if it is used to pay for registered* or approved childcare. This can include: Childminders, nurseries and playschemes registered by Ofsted. Out of hours clubs run by a school on the school premises or by a local authority. Childcare schemes run by approved providers. An approved foster-carer (the care must be for a child who is not the foster carer's foster child) In England only, a childcarer who is approved by Ofsted to care for your child or children in your own home - these are childminders who have further qualified to become "home childcarers". In England only, a childcarer approved under the Childcare Approval Scheme (see end of document for information about the new Childcare Approval Scheme which will operate from April 2005). In England only, childcare given in the child's own home by a domiciliary worker or nurse from a registered agency. In Scotland only, childcare given in the child's own home by (or introduced through) childcare agencies, including sitter services and nanny agencies, which must be registered. "NB: Childcare provided by a relative*of the child is generally not eligible for help via the childcare element of the Working Tax credit or the tax and NICs exemptions on employer-supported childcare. The sole exception to this is the situation in which a relative has been registered or approved as a child-carer, and happens to care for a related child, but whose primary or main paid child-caring is for children to whom they are not related . In short being a paid child-carer for the child to whom they are related is INCIDENTAL to their usual paid child-caring. This care must be provided outside the child's own home." childcare services which have been registered and inspected by Ofsted (England only), the Care Standards Inspectorate for Wales, the Scottish Commission for the Regulation of Care and the Health and Social Services Trust in Northern Ireland. A relative of the child means a parent, grandparent, aunt, uncle, brother or sister --whether by blood, half blood, marriage, or affinity. Can all childcare providers accept childcare vouchers? Yes, as long as the provider has a bank account. In order to receive the reimbursed value of a childcare voucher, childcare providers will need to register their details with the childcare voucher company. This is usually a record of contact details, registration number where appropriate, and bank account details if the voucher company intend to make payments directly into the back account of the carer. There is no cost to the childcare provider in receiving payment through childcare vouchers. Information packs that explain the voucher processes for childcare providers are available from most voucher companies. How much will it cost? The only cost to an employer who signs up to a childcare voucher scheme is the management fee to the voucher company. These vary and are often negotiable with the voucher company. Some may charge a set rate whilst others may charge a percentage (usually about 5 per cent) of the overall value of childcare vouchers requested by an employer. However the savings a company makes in terms of reduced NICs usually exceeds the management fee charged by the voucher company. Will it involve extra work for our organisation? There is minimal administration for an employer when operating a childcare voucher scheme. In general, voucher companies can be responsible for most of or all of the administration involved, though you can often negotiate what you would like them to be responsible for and what elements you are happy to administer in house. This will obviously affect the fee charged by the voucher company. It is important to involve different staff groups including management team, HR staff, payroll managers and administrators, employee or union representatives in this planning process to ensure that the arrangements and responsibilities that you agree to are realistic and will be the most efficient for you as an employer. In the case of Salary Sacrifice it is important that a clear contractual change takes place between employer and employee. What about workplace nurseries - do they qualify for the same NICs breaks? If schemes meet the criteria for workplace nurseries (for information about the criteria, look at page 5 of this booklet on the Inland Revenue's website: www.inlandrevenue.gov.uk/helpsheets/e18.pdf ), they qualify for full tax and NICs exemptions. For more information from the Inland Revenue about all the ways in which employers can help employees with childcare costs, go to: www.inlandrevenue.gov.uk/helpsheets/e18.pdf What should you be aware of: Childcare vouchers are a great incentive for your employees, but before staff commit to entering a childcare voucher scheme involving salary sacrifice, it is important to make them aware of all the features of salary sacrifice and how it might affect their overall financial position. In most instances the benefits of childcare vouchers are likely to outweigh any negative effects, but employees must be able to make an informed decision based on their own circumstances. Period of contract: When an employee agrees to sacrifice part of their salary for childcare vouchers the contract of employment will need to be amended or an additional contractual agreement will need to be signed. This agreement will usually be for a set period of time, usually for one year, after which the agreement can be reviewed. The employee does not have an automatic right to revert back to their original salary within the contractual period. Many employers and schemes will however, offer an earlier review of the agreement in the event of "unexpected life changes", which is anything linked to birth, death and marriage. In other extreme circumstances you as the employer can ask your local Tax Office if your employee may leave the scheme. Employers should be clear on what change in circumstances they might consider and can discuss this in more detail with a childcare voucher company. Terms and conditions of employment: Adverse effects from using salary sacrifice can arise because many other employer-provided benefits are calculated on the basic salary, for example, overtime, sick pay, shift allowances, on-call time, uniform allowances and employer's maternity pay. Best practice is to maintain the link with the full or "notional" salary value, allowing employers to ensure that any salary based enhancements are based on the salary before the sacrifice. It is good practice for employers to protect the benefits they provide. Effects of Salary Sacrifice on work-related benefits: The amount employees receive in childcare vouchers will not count as part of work-related payments such as Statutory Maternity Pay (SMP) and Statutory Sick Pay (SSP), which are based on an employee's average earnings over a fixed period. As pregnancy is a "life-changing event" it should be possible to review the employee's amended contractual arrangements (which permitted the original salary sacrifice) and (if she wants to) she should be able to leave the scheme before working the eight weeks period on which her SMP will be based and thus ensure it will not be affected. Effects of Salary Sacrifice on contribution- and earnings-related benefits Contribution-based benefits are calculated according to the level of National Insurance Contributions (NIC) paid by an individual. An individual's eligibility for contribution-based benefits may be affected by their participation in a childcare voucher salary sacrifice scheme, as their NICs will decrease. Examples of some benefits that may be affected include Jobseekers' Allowance, Incapacity Benefit and the State Pension. Earnings-related benefits such as Maternity Allowance and the State Second Pension are based on an individual's income and do not take into account the amount received in childcare vouchers as income, therefore reducing the rate of these benefits. More information on the effects of childcare vouchers schemes and salary sacrifice may have on employees' work-related payments and benefits is available on line from the Inland Revenue - www.inlandrevenue.gov.uk Effects on Child Tax Credit and Working Tax Credit: The Child Tax Credit (CTC) offers financial support with general family costs. Working Tax Credit (WTC) supports those on lower incomes and working parents may be eligible for additional help towards registered childcare costs. The amount of help parents receive will depend on a number of factors including their income, the size of their family and the amount they pay in childcare. The receipt of childcare vouchers through a salary sacrifice scheme can affect parents' entitlements to these tax credits in two main ways. Where employees' average earnings have effectively been reduced, they could receive a higher payment through the WTC. However, the value received in childcare vouchers from an employer, cannot be considered as childcare costs when calculations are made for their entitlement to the childcare element of WTC. (Essentially because you cannot claim twice for the same benefit). The childcare element of WTC may therefore be reduced. It is advisable for parents to find out what level of support they could be entitled to through the CTC and WTC before they sign up to a childcare voucher salary sacrifice scheme. In some instances parents may be financially better off opting to receive help through the WTC rather than through their employer's childcare voucher scheme. For more information on Child Tax Credit and Working Tax Credit contact the Tax Credit helpline on 0845 300 3900 or visit www.taxcredits.inlandrevenue.gov.uk How can I tell whether an employee would be better off with Tax Credits, or with a voucher scheme? The following bullet points provide a rough guide as to whether someone would get more help from Tax Credits, or from employer-supported childcare, but each individual situation should be checked carefully before deciding which benefit is better for an employee. Employees will always benefit from taking a tax and NICs-free voucher if it is offered on top of their salary. Generally, if employees are getting £545 or less a year in total from Tax Credits, they will be better off using vouchers. Generally, if an employee is getting more than £545 a year in total from Tax Credits, they will not gain from claiming the tax and NICs exemptions - unless they are a higher rate tax payer. How much can employees receive in vouchers? There is no limit on the amount you can give employees in vouchers - however only the first £50 qualifies for NICs exemptions for employers, and tax and NICs exemptions for employees. The only legal consideration is (if you operate Salary Sacrifice) that the employee's cash pay must not fall below the minimum wage. Childcare Approval Scheme This is a new scheme for approving forms of childcare not previously able to be registered (and thus not able to qualify for help through Tax Credits, and for tax and NICs breaks on employer-supported childcare). This scheme enables carers caring for a child in the child's own home (such as nannies), or caring for children over 7 on other domestic premises (such as childminders) to become "approved" by showing that they have certain qualifications. The scheme is voluntary. Childcarers can apply for approval from 4 January 2005, although no approval will be effective before 6 April 2005, when the scheme starts. For more information about the Childcare Approval Scheme, ring the helpline: 0845 7678 111 or visit: www.childcareapprovalscheme.co.uk From 6 April 2005 there are three key changes in the administration of Childcare Vouchers** If you have a voucher system, the scheme must be generally available to all employees where the scheme applies (before 6 April 2005 employers could supply vouchers to sections of the workforce in a workplace). The first £50 supplied in Childcare Vouchers is free from tax, as well as National Insurance Contributions (NICs) for the employee, and free from NICs for the employer (before 6/04/05 an unlimited amount supplied in Childcare Vouchers was free from NICs for both employers and employees, but not from tax). Vouchers can be used to pay for all forms of legal childcare, but after 6 April 2005 will not qualify for the tax and NICs exemptions on the first £50 supplied unless they are used to pay for registered or approved childcare (before 6/04/05 childcare vouchers qualified for NICs exemptions when they were used to to pay for any form of legal childcare). Note: This information was taken from Childcare Vouchers for Employers - Daycare Trust factsheet on childcare vouchers
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