What's happening in 2015?
The Government announces changes to childcare vouchers from 2015
As childcare costs continue to rise, the Government has used the 2013 Budget to announce new measures to support working parents. The proposals will make childcare vouchers available to more families and will enable many parents to enjoy higher savings on their childcare costs. However, not all families will be able to benefit from the changes. Here's our guide to the new childcare voucher scheme and a look at the winners and losers:
- A new childcare voucher scheme, due to be launched during or after Autumn 2015, is expected to allow parents to receive Government funding for up to 20% of their childcare costs.
- Current childcare voucher arrangements are to remain in place and open to new members until the new scheme is launched.
- Parents who sign up for the current childcare voucher scheme will be able to remain in it even after the new scheme has launched. However, some current scheme members may choose to switch to the new scheme from 2015, as in some cases this will provide higher savings.
- Under the new arrangements, parents will set up an account with a childcare voucher provider such as KiddiVouchers, and they will pay into this account to purchase childcare vouchers. The Government will top up each parent's childcare voucher account with a 20% contribution towards their childcare costs, up to a maximum contribution of £1,200 a year per child.
- Under both the current scheme and the new scheme, parents are only allowed to use their childcare vouchers to pay for registered childcare.
- The new scheme will initially only be available in respect of children under 5, although there are plans to make it available for all children under 12, probably by 2020.
- The new arrangements will only be available to single parents who work at least 16 hours a week, or to couples who both work at least 16 hours a week.
- The Government has also announced that lower earners will be eligible for up to 85% of their childcare costs to be paid by Universal Credit from April 2016 (compared to up to 70% in the current tax credit system). Parents who receive tax credits or Universal Credit will be ineligible for childcare vouchers.
The winners and losers
- Parents who sign up to the current childcare voucher scheme will be able to remain in the scheme, so they will not be directly disadvantaged by the proposed 2015 changes. However, if they move to a new employer after 2015 they will probably be considered to have left the current scheme and be forced to switch to the new arrangements.
- Some parents will not be ready to use childcare vouchers until after the new scheme starts. In some cases, these parents will receive lower savings from the new arrangements than they would have had under the current scheme.
- The new scheme will not be available to families where either parent earns over £150,000, whereas the current scheme allows high earners to enjoy tax savings at the same level as basic-rate taxpayers.
- The current scheme allows basic-rate taxpayers to order up to £243 a month in childcare vouchers. In a two-parent family with both parents claiming childcare vouchers, this provides savings in tax and National Insurance of £1,866, regardless of how many children are in childcare. However, the new scheme provides maximum savings of just £1,200 per child.
- Therefore, for couples with only one child in childcare, the current childcare voucher scheme offers higher savings than the new scheme.
- Couples will be better off under the new scheme if they have two or more children under 5 and their annual childcare costs exceed £9,330 for basic-rate taxpayers or £6,250 for higher-rate taxpayers. Couples with only one child, or with lower childcare costs, or with one parent out of work, are better off under the current regime.
- Single parents will be better off under the new scheme if they have one or more children under 5 and their annual childcare costs exceed £4,665 for basic-rate taxpayers or £3,125 for higher-rate taxpayers.
- The new arrangement will not provide any National Insurance savings (currently worth up to 12% for basic-rate taxpayers and up to 13.8% for employers). For some employers, this will be a significant loss, which could have a knock-on effect on the amount which they are able to spend on other employee benefits. Local authorities and NHS Trusts are among the employers who will be hit, potentially leaving a hole of hundreds of thousands of pounds in their budgets. However, as the new scheme will be phased in gradually, employers will at least have time to prepare for this change.
What action should parents take?
Parents who aren't already using childcare vouchers should ask their employers to set up a scheme now, rather than waiting until the new scheme is launched in 2015. Employers enjoy National Insurance savings from the current scheme, so it is in their interest to set up a scheme before the 2015 deadline.
Will there still be a role for employers in the new scheme?
Although the new arrangements take the onus away from employers, we believe employers will still have a key role to play. Many parents use childcare vouchers as a way of budgeting for childcare costs and appreciate the benefits of their childcare payments being taken direct from salary. We anticipate that employers will, in many cases, wish to support their employees by gradually replacing their existing salary sacrifice schemes with voluntary payroll deduction schemes. Although employers will no longer benefit from National Insurance savings, providing easy access to childcare vouchers will still allow them to enjoy the benefits of better staff engagement and higher morale.
So is the Budget good news for childcare?
It's certainly welcome that the Government is taking the issue of childcare seriously and continuing to offer a tax break to working parents. The new proposals are generally considered to be a step in the right direction, but many parents need financial help now rather than waiting until 2015. Arguably it would have been simpler and more effective to increase the tax-exempt allowance on the current childcare voucher scheme with immediate effect, and to simply tweak the current scheme to make it available for the self-employed and lower earners.
Although the new scheme aims to make childcare support open to more parents (including the self-employed and those on the National Minimum Wage), families with only one parent in work will lose out. The requirement for both parents to be in work is likely to be painful for parents who have experienced redundancy or who are unable to find work. In these cases, parents are often reluctant to cease using childcare, for fear of losing their child's place with their chosen childcare provider. Where parents hope to return to work quickly, or where they are actively seeking work, it is often not practical for them to stop using childcare.
The requirement for parents to be in work is aimed at making work pay, but it could be said to under-value stay-at-home parents. These parents may also have a real need for childcare, for example to broaden their child's development, to accommodate voluntary work or training, or to have a break from the hard work of full-time parenting. We will be asking the Government to simplify the new scheme and to broaden its appeal by rethinking this restriction.
We also continue to recommend that tax credit support should be provided to parents in the form of childcare vouchers. We believe this would help parents to budget for childcare costs, ensure the support is used to pay for registered childcare and lead to improved efficiency. The extension of the new scheme to parents on National Minimum Wage is to be welcomed, but in many cases low earners receive support through tax credits and so will not be eligible to benefit from childcare vouchers.
In some cases, the new proposals will provide higher savings for parents. However, not all parents will benefit and the administrative details have yet to be finalised. We look forward to taking an active role in Government consultations as the details of the new scheme are ironed out. We continue to press for further improvements and to champion the needs of parents, employers and childcare providers alike.