Childcare Vouchers - Continued
In our first article on childcare vouchers we indicated that employees who get help with their childcare costs through tax credits should be very careful before taking childcare vouchers from their employers. They could be a lot worse off.
We pointed out that guidance from the Inland Revenue, as the government department responsible for explaining the scheme, was largely inadequate.
We have carried out a review of websites to see how well the disadvantages of vouchers are currently being recognised.
Revenue guidance is lacking
The tax credits system already gives help of up to 70% of eligible childcare costs for those working on modest incomes. When an employer pays for that childcare with a voucher, the 70p in the £ that the employee is usually receiving from the government is taken away.
But this is not always the case. Eligible childcare costs are £175 per week for one child or £300 for two or more children. Some employees pay more childcare than that, so if the vouchers do not reduce the employee's cost below those levels the government does not take anything back. But this level of childcare tends to be paid by those on higher incomes.
Even if you sacrificed salary for vouchers in the tax year just ended and reduced your childcare costs without reducing your tax credits, it may mean, without you doing anything, that you lose money in 2005/06 if you continue the sacrifice. This is because the government increased the eligible childcare costs from £135 for one child and £200 for two or more children in 2004/05 to £175 and £300 for 2005/06.
For example, if with one child your childcare costs last year were £160 per week and you took vouchers in a sacrifice to reduce them to £140 per week, then there was no loss of credits up to 5 April 2005. But from 6 April 2005, you will lose potential credits of £14 per week (£20 @ 70p in the £) and you will need to do the sums to see how you fare.
As a broad generalisation, basic rate taxpayers involved in salary sacrifice of existing salary will often be in a no win/no loss position. They will lose the 70p in the £ childcare credit, but at the same time will gain 70p in the £ (37p in extra tax credits, 22p in income tax and 11p in national insurance).
If they pay tax or national insurance at lower rates than this, they are likely to lose, but if paying at higher rates, they are likely to gain. But, as we outlined in the first article , there are many variables and these can change several times in a tax year, both for and against vouchers.
And remember from the first article, if the employer is offering vouchers or cash as an alternative as part of a pay rise, the figures will change again, probably in favour of taking the cash.
Even those on higher incomes can get childcare support from tax credits
There also tends to be an assumption that working tax credits are for the "poor" but you can benefit from the 70p in the £ from the government with an income where you are well into the higher rates of tax. The problem with tax credits is that it is not always easy for you to work that out for yourself.
This is why it is so desperately important for the government department, the Inland Revenue, which claims to be there to "ensure that everyone understands and receives what they are entitled to", to be at the forefront of explaining these things.
The Revenue also do not clearly explain that someone who gets a voucher which reduces their entitlement to tax credits will almost certainly have to notify them of that fact within three months or land themselves with a penalty. This is because there is a requirement for employees to notify changes where eligible childcare costs reduce by £10 or more a week. By getting your employer to pay your costs, your costs go down.
The Cabinet Office recognises the importance of the tax credits issue and requires every Civil Servant to be given appropriate advice:
"The Department must ensure that staff who agree to join the [childcare] scheme understand the effect of a reduction in their pay and any potential effect to their entitlement to State Pension and benefits and Tax Credits before they enter into a salary sacrifice arrangement." (Cabinet office guidance to Civil Service Departments)
This is good advice. But how many employers will give the same warning and provide the necessary advice and support?
Revenue childcare literature encourages the individual to ring the Tax Credits Helpline on 0845 300 3900, or 0845 603 2000 in N.Ireland, for assistance; they are the people who know about you and should be the people to advise you. If they do not, then please let us know through our Contact page.
Some employers' guidance is equally misinformed
We have reviewed the websites of close to 50 significant employers and the major childcare voucher suppliers. There are very few who give even a passing mention to the possible downsides of their childcare schemes. The employers rely on the voucher companies and they, in turn, pass the baton to the Revenue. We therefore are back to the problem illustrated in our first article whereby no-one will advise those that really need it.
Some of the following quotes may give you a flavour of why there could be a major problem building up out there:
"we have introduced a scheme whereby part of your salary can be exchanged for childcare vouchers. These vouchers are exempt for National Insurance contributions and therefore represent a saving for ABC Police and you." (Major police force)
"From 1 April 2005, childcare vouchers will be exempt from income tax as well as NI contributions up to a maximum of £50 per week or £2600 per year. This means that an individual earning up to £35,000 per annum can save £858 per year and those earning £35,000 and over can save £1066 per year. Both parents can participate in the scheme, therefore doubling the potential savings." (Leading University)
"We offer an entitlement which enables our employees to order childcare vouchers in place of some of their pay. We deduct the monetary value from their pay and they save £'s as they don't pay National Insurance on the amount paid out for vouchers."(Borough council)
"With effect from April 2005, each parent or legal guardian of a child up to the age of 16 will be able to receive childcare vouchers (subject to certain conditions) which are non taxable and exempt from National Insurance contributions up to the amount of £50 per week (£217 per month)." (City council)
"The tax change could see a parent saving up to a maximum of £1,066 per year by purchasing childcare vouchers rather than paying nursery fees in cash." (County council)
"After April, basic rate tax payers, who take at least £2,600 of their salary in vouchers, will save £850 a year by taking part in a voucher scheme." (Voucher company)
"But because childcare is such a significant cost for many working parents, the vouchers give us an easy and effective way of helping our colleagues and don't discriminate against either store-based or head office staff: anyone using childcare can benefit."(Major supermarket chain)
"For example: · for someone who pays the lower rate of tax, i.e. 22 per cent, this could save them as much as £800 per year; · for those who pay 40 per cent tax then their savings could be more than £1,000 per year. And as this saving is per tax payer, if both parents work at XYZ hospital or for an employer with a similar scheme the savings will double.
Sound too easy? Well that really is it." (Major hospital)
Contact Name: John Andrews (Tel: 0844 579 6700, Fax: 0844 579 6701)
Relevant Link: TUC sacrifice advice