The childcare voucher scheme was an optional benefit that companies offered their employees so they could reduce the cost of childcare.
But now, childcare vouchers have changed to a scheme called "tax-free childcare". Read on to learn more about what these schemes are and why they've changed, so you can best equip your team with the childcare benefits they need.
What are childcare vouchers?
Essentially, it worked by allowing their employees to pay for childcare out of their pre-tax income so they could save on tax and national insurance. Most companies offer the vouchers as part of a "salary sacrifice".
Here's an example of how that works: employee A gives up £1,000 from their salary–which, after tax and national insurance, is about £700. In return, employee A is given £1,000 of childcare vouchers, effectively saving them £300.
The vouchers could be used with any registered provider who accepts childcare vouchers. Expenses such as things daycare, after-school activities and clubs, nannies, and other childcare needs can be subsidised by these vouchers.
That being said, the scheme was closed to new entrants in October 2018. However, existing users can continue to benefit for as long as they remain eligible.
Instead, a new scheme has been introduced: the tax-free childcare scheme.
Why have childcare vouchers changed?
Like most employee benefits, childcare vouchers are not a "one size fits all” for parents. As a matter of fact, there are two glaring downsides to your employees using vouchers:
- It reduces their pay.
- Vouchers may not be the most cost-effective scheme for them.
As a result, there was increased pressure on the government to do more to assist parents with childcare costs.
So following pressure from working parents, two schemes were introduced:
- Tax-free childcare
- Workplace nurseries
What is the tax-free childcare scheme?
Tax-free childcare is a government scheme that helps with childcare costs up to a maximum of £2,000 for each eligible child each year (£4,000 if your child is disabled). Tax-free childcare is a UK-wide scheme covering England, Scotland, Wales and Northern Ireland.
What is a workplace nursery?
Put simply, it’s a nursery provided by a business for its employees.
Under the ‘Workplace Nursery Exemption’, the cost of admission and childcare services in a workplace nursery is tax and National Insurance free. This is often done through salary sacrifice, where employees give up a part of their salary for the childcare cost amount. The amount is paid to the workplace nursery which in turn saves the amount of tax and NI employees pay. Here's an example to better illustrate this:
Benefits of workplace nursery schemes
Offering workplace nurseries as part of your benefits package can be beneficial for your business and your employees:
- Businesses can claim tax relief on the costs associated with the nursery’s operation.
- Businesses can save on employers’ National Insurance Contributions.
- Workplace nurseries provide convenience for your staff.
- And they are a behemoth staff recruitment and retention tool.
For example, if your employee’s child attends the qualifying nursery, the full childcare bill will be tax and national insurance free. From a business point of reference, offering a workplace nursery can be an alluring talent magnet during your recruitment process—attracting and retaining top talent! Because of the salary sacrifice aspect, introducing a workplace nursery integrates seamlessly into your payroll.
Meanwhile, your employees, who would have once struggled with the decision of returning to work, get a beacon of support that not only acknowledges the financial strain of nurseries but actively addresses it. If your employee’s child attends a workplace nursery, they won’t have to pay any Income Tax or National Insurance Contributions on the cost.
By taking the financial burden off their plates, you foster a workplace culture that values employees as real people with multifaceted lives and goals outside of the office.
Also if the nursery is in the same office building or close to work, for many working parents, a workplace nursery gives them peace of mind about their child’s wellbeing. On top of that, the stress of early-morning drop-offs, and post-work, rush-hour pick-ups are taken off their plate.
The change from the childcare voucher scheme to the tax-free childcare scheme can be tricky to wrap your head around, but we're here to help. Book a demo with one of our Benefits & Rewards Specialists to learn more about this scheme and how Ben can help make sure your employees have the childcare benefits they need covered.