Childcare Vouchers

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What are childcare vouchers?

Childcare vouchers are one of the ways in which employers can assist their employees with the costs of childcare.  Childcare vouchers are exempt from National Insurance Contributions (NIC) for employees so they can help you save money with your childcare fees.

How does a childcare vouchers scheme work?

Your employer will normally sign up to a childcare voucher company and will pay that company an administration fee for their service.  The voucher company will either supply you directly with your childcare vouchers or they will provide your employer with them, which they will distribute to staff accordingly.  Employees in receipt of childcare vouchers can use them to 'pay' their childcare provider   The childcare provider will then redeem the value of the voucher from the childcare voucher company, usually by direct payment into a bank account.

How do childcare vouchers save me money?

Childcare vouchers can be offered to you in addition to your cash salary but are more commonly offered as a "salary sacrifice".  This means that you sacrifice a specific amount of your salary and instead receive that amount in childcare vouchers up to a limit of £55 per week, or £243 a month. This is exempt from Tax and National Insurance Contributions (NIC), so you will only pay tax and NIC on the reduced level of your salary.

What is a salary sacrifice?

Salary sacrifice means that an employee formally (by a change in their contract) agrees to a reduction in their salary and instead receives that amount in childcare vouchers.  (The first £55 per week of the value of childcare vouchers is exempt from NIC and tax).

The contact between employer and employee will need to be updated or a signed agreement included within to reflect the salary sacrifice agreement.  This should make clear the reduction in salary the employee has agreed to, the length of time of the agreement and the amount they will receive in vouchers.

How much can I receive in vouchers?

You can receive any amount in vouchers, but only the first £55 is free from tax and NICs.  If you are involved in a salary sacrifice scheme and receive the rest of your salary in vouchers, the only legal consideration is that your cash pay must not fall below the minimum wage.

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

Childcare vouchers can currently be used to pay for any legal form of 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.

Registered Childcare

• Day Nurseries (private, community or local authority)
• Workplace nurseries
• Childminders and approved childcarers
• Pre-school playgroups
• Nursery schools
• Out of school clubs and holiday clubs

Including:

• Childcare schemes run by approved providers.  A list of quality approved schemes used to approve childcare services under this category can be found at their website, linked below.
• An approved foster-carer (the care must be for a child who is not the fosters carer's foster child).
• In England only, childcare given in the child's own home by a domiciliary worker or nurse from a registered agency.

"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 INCIDENTIAL 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 Regulartion 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 payment through childcare vouchers?

Yes, as long as they have a bank account.  In order to receive the childcare voucher reimbursements the childcare provider 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 details.  There is no cost to the childcare provider in receiving payment through childcare vouchers. Information packs explaining childcare voucher to childcare providers are available from most voucher companies, should your childcare provider have any concerns.

What you should be aware of:

Childcare vouchers are a way of effectively decreasing your childcare costs, however, it is important that you are aware of all the features of and effects of a salary sacrifice scheme.

Period of contract:

When you sign up to a childcare voucher scheme, you will generally be required to do so for a fixed period of time (often one year) after which your agreement can be reviewed.  You will be asked to sign a contractual change confirming that you agree to sacrifice part of your salary in return for childcare vouchers.  This means that (within the period covered by the agreement) you do not have an automatic right to stop receiving childcare vouchers and revert back to receiving your full salary.  Most schemes/employers will offer an earlier review of your agreement in the event of an unexpected life change, which is anything linked to birth, death and marriage.  In other extreme circumstances your employer can ask their Tax Office if you may leave the scheme, but you should discuss this with your employer prior to signing an agreement.

Child Tax Credit and Working Tax Credit:

The Child Tax Credit (CTC) offers parents support with general family costs, and is available to nine in ten families.  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 can affect parents' entitlements to these tax credits in a couple of ways.  As your average earnings will effectively be reduced, you could receive a higher payment through the WTC.  However, the value you receive in childcare vouchers from your employer cannot be declared as childcare costs when calculations are made for your entitlement to the childcare element of WTC.  This is to ensure that you are not claiming for the same assistance with childcare twice.  The childcare element of WTC may therefore be reduced.

Parents are advised 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 employers childcare voucher scheme.

How do I know whether I would be better off with Tax Credits, or with a voucher scheme?

The following points provide a rough guide as to whether you would get more help from Tax Credits, or from employer-supported childcare, but you should also make sure that you check your individual situation carefully before you decide which benefit is better for you

• You will always benefit from taking a tax and NIC free voucher if it is offered in addition to your salary.
• Generally, if you are getting £545 or less a year in total from Tax Credits, you will be better off using vouchers.
• Generally, if you are getting more than £545 a year in total from Tax Credits, you will not gain from claiming the tax and NIC exemptions - unless you are a higher rate tax payer.

For more information on Tax Credits view the website at the end of the page or call 0845 300 3900.

Work related payments:

Some payments made to you by your employer are based on your average earnings and the amount that you substitute to receive in vouchers is not included as part of your average earnings when work related payments are made.  However, Childcare Vouchers can be classed as Notional Pay, which means that most employers do not let your benefits become affected.

Statutory Maternity Pay (SMP) and Statutory Sick Pay (SSP) - calculations made for SMP and SSP are based on your average earnings excluding the amount you receive in vouchers meaning the rates of SMP and SSP you receive may be reduced.  However, as pregnancy is a "life-changing event" it should be possible to review your amended contractual arrangements (which permitted the orginal salary sacrifice) and you should be able to leave the scheme before working the eight weeks period on which your SMP will be based - and thus ensure it will not be affected.

If your average weekly earnings excluding the amount you receive in vouchers falls below the Lower Earnings Limit (LEL), which is currently £4615 per annum, you will not be entitled to SMP or SSP, but may be entitled to Maternity Allowance and Incapacity Benefit respectively.

Speak to your employer about how salary sacrifice could affect these and other work related payments before you sign up to a childcare voucher scheme.

Contribution-based benefits:

Your entitlement to some benefits is calculated according to the level of National Insurance Contributions (NIC) you have made. Should you sign up to a childcare voucher salary sacrifice scheme, your NIC will be reduced, which in turn could reduce your entitlement in the future to some of the following contribution-based benefits.

Incapacity Benefit

If your earnings fall below the LEL (£4615 p a) you may not be entitled to receive Incapacity Benefit.  In this instance you would need to claim Income Support.

Jobseekers Allowance (contribution based)

If your earnings fall below the LEL or if your NIC have been reduced to a lower amount, you could become ineligible to receive the contribution-based Jobseekers Allowance.  In this instance you would need to make a claim under incone-based Jobseekers Allowance.

State Pension

On your retirement, the amount you receive through your State Pension could be reduced if you have not paid NICs or if these have been paid at a lower level.

Voluntary Ofsted Registration

This is a new scheme for approving forms of childcare not previously able to be registered (and thus no 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 8 on other domestic premises (such as childminders) to become "approved" by showing that they have certain qualifications.  The scheme is voluntary.  For more information about the Voluntary Ofsted register ring the help line: 08457 678 111 or visit: their website, linked below.

NB:  There have been three key changes in the way Childcare Vouchers will be administered (from 6 April 2005).

• If your employer has a voucher system, the scheme must be generally available to all employees where the scheme applied
• The first £55 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 April 2005 an unlimited amount supplied in childcare vouchers was free from NICs for both employees and employers, 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 £55 supplied unless they are used to pay for registered or approved childcare (before 6 April 2005 childcare vouchers qualified for NICs exemptions when they were used to pay for any form of legal childcare).

Further Information

Further information can be obtained from these external agencies:

Organisations Offering Childcare Voucher Packages

Contact details of some organisation who can offer childcare voucher packages:

This information has been complied by Kingston Families' Information Service and was accurate to the best of our knowledge at the time of inclusion.  Inclusion on this list does not signify recommendation or endorsement.

For further information contact:

Kingston Families' Information Service
132 Kingston Road
New Malden
KT3 3ND

Telephone:  020 8547 6582
Fax:  020 8547 6667

Email:  fis@rbk.kingston.gov.uk

Visit:  Monday to Friday 9am to 5pm