Save thousands of pounds with childcare vouchers
For many people this year will be one of managing with less money, not least for the estimated 1.2 million families that from 7 January have lost some or all of their Child Benefit because at least one parent earns more than £50,000 a year.
The cutbacks mean a family with three children could lose out to the tune of £2,450 a year, according to Capital Economics.
The government has proposed plans to provide families with tax-relief worth 20% on childcare costs from 2015 worth upto £1,200 per child. However until that scheme is introduced parents can still slash their childcare bill by purchasing childcare vouchers from their employer. And, when the new scheme is introduced they will be able to work out whether they will be better off sticking with their employer's vouchers or taking the government's tax-free offer.
Here we answer your questions about what existing childcare vouchers are, how they work and where you can get them.
How do they work?
The vouchers are purchased by parents out of pre-tax income, so families on basic-rate tax can save up to £933 a year if one parent buys them or £1,866 if they both do. Higher-rate taxpayers who joined a scheme from 6 April 2011 onwards can save up to £623 each or £1,246 for a working couple.
Despite the financial incentive, the take-up of vouchers is quite low, with just 4 to 5% of parents buying the vouchers.
Julian Foster, managing director of Computershare Voucher Services, one of the biggest players, says: "We know according to HM Revenue & Customs figures about 500,000 people use them regularly, about 80% of whom are basic-rate taxpayers and 20% higher and additional-rate payers."
Why aren't more parents using them?
The low take-up is blamed partly on low-profile marketing, with many working parents and even employers unaware of the vouchers' existence. However, providers are pressing the government to do more to spread the word.
Alison Chalmers, director of provider KiddiVouchers, says: "Currently, the government does not provide extensive marketing literature and information for parents regarding the financial benefits of childcare vouchers, but we are encouraging the government to put more information in new parent packs."
Foster also blames a misconception among parents about how they can be used. He says: "Most people associate vouchers with pre-school nursery costs when in fact families with older children could also be using them for holiday and after-school clubs, and even extracurricular activities such as piano lessons, so long as it is in an Ofsted setting or with an Ofsted-registered teacher or the equivalent in Scotland and Wales."
Who provides the vouchers?
Working parents have to buy the vouchers (which are either issued online or are paper-based) through their employer, which will either run its own scheme or use an external provider. If an employer currently does not offer vouchers, parents should ask it to introduce a scheme, although it isn't obliged to agree.
Many providers offer to help you make that request and will highlight possibly the most compelling factor – how employers can save money (as much as £400 a year per employee before administration charges).
There are also plenty of providers to choose from. About 80% of vouchers are sold by members of the Childcare Voucher Providers Association (cvpa.org.uk), which adheres to a strict code of conduct. Unfortunately, those who are self-employed are not currently eligible, although directors of limited companies can use them.
How do I pay for them?
You normally pay via salary sacrifice, which means your salary is reduced by the value of the vouchers before tax and national insurance (NI) is deducted. A basic-rate taxpayer can sacrifice £55 a week, or £243 a month, while a 40% taxpayer can give up £28 a week or £123 a month. If mum and dad both work and have access to vouchers, they can buy double these amounts.
How does the tax benefit work?
A basic-rate taxpayer buying the maximum monthly allowance saves £933 in tax and NI over a year, a higher-rate payer who joined a scheme since April 2011 saves £623 and an additional-rate payer £606.
How long are my children eligible?
You can use vouchers until your kids turn 15 (16 if they are disabled) and depending on their birthday you may be able to use them until they are nearly 16 (17 if disabled) as they qualify up to the first Saturday following 1 September after their 15th birthday (16th if disabled).
Where can I use them?
You can spend your vouchers with nurseries, childminders, crèches and pre-school as well as on after-school activities and childcare during school holidays.
However, the childcare provider must be registered with Ofsted (or equivalent in Scotland and Wales) and make an agreement with your employer to accept payment with vouchers and to register to receive for the payment either with the employer or voucher provider.
Do vouchers expire?
Most e-vouchers do not expire but paper vouchers may have a 12-month expiry date. However, providers will usually replace them if unused by the expiry date.
Can unused vouchers be refunded?
The taxman does not like refunds apart from exceptional cases, such as redundancy or the death of a child, but in practice it is up to individual employers to decide, although they will have to sort out the tax and NI implications. Vouchers cannot be transferred to another employer if you move jobs.
Are there any drawbacks?
There are potential pitfalls. Since voucher buyers pay less tax and NI, any state benefits linked to these contributions can be affected, including statutory maternity pay and statutory sick pay. State pension entitlement should not be affected as long as the parent meets the minimum NI contributions necessary, although the state second pension may be affected.
Parents who are entitled to the childcare element of working tax credit could lose out if they choose vouchers instead. To help work out which option is best, go to hmrc.gov.uk/calcs/ccin.htm to try the online HMRC childcare calculator.
Karen Clark, head of personal tax at accountants Baker Tilly, says the value of company benefits such as life cover and pensions may be affected, although some employers choose to ignore the impact of vouchers in their calculations.
Clark adds: "Another potential pitfall is mortgage borrowing. If you have given up nearly £1,500 of salary for vouchers, a lender will likely deduct that amount from its sums. If you are after a loan on three times salary, being unable to borrow that extra £4,500 may make all the difference."
It's also worth noting that savings are based on a parent's salary, not on the size of your family, so you can't save more money if you have more than one child.
Can I start buying them while pregnant?
If you are expecting your first child you are not allowed to buy any vouchers until the baby is born but with subsequent children you can stock up while pregnant. An employer is obliged to continue giving you the vouchers during maternity leave and to meet the cost if your pay ends up below the statutory minimums.
McSweeney says: "This can put some employers off providing a scheme especially if they have a large female workforce, although larger employers tend to just accept the extra cost."
How do the schemes differ?
Childcare vouchers are very simple products so providers can only differentiate themselves by price and service. For example, some offer online vouchers rather than paper ones which are cheaper to administer. Some providers offer extra services, too, such as Kidsunlimited, which offers access to BestDoctors, a service giving medical advice and discounts at shops such as Mothercare.
How the rules have changed
Mums and dads joining a scheme since 6 April 2011 have had the value of childcare vouchers they are allowed to buy capped at £243 a month for a basic-rate taxpayer, £124 a month for a higher-rate taxpayer and £97 a month for an additional-rate taxpayer.
However, parents who joined a scheme before 6 April 2011 can continue to buy up to £55 a week in childcare vouchers under a 'protected rights' arrangement, no matter what tax bracket they are in.
To remain eligible, parents must stay in the same scheme and buy vouchers at least once in a 12-month rolling period. Changing employer and scheme or not making a purchase for 12 months means the new limits will apply.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
A special government scheme operated through employers that allows you to pay for childcare from your PRE-tax salary. The vouchers cover childcare up to 1 September after your child’s 15th birthday (16th if they are disabled) and can be used at any registered and regulated nursery, playgroup and for nannies, childminders or au pairs.