As you may be aware, after some delay, the Government launched a new Tax Free Childcare scheme in 2017, which is available to the majority of working parents. Although the Government Scheme will ensure most parents with eligible* children have access to ‘tax free’ childcare, the savings for a number of parents will not be as high as currently enjoyed in existing Childcare Voucher Schemes.
How will this impact the ABC Company Childcare Voucher Scheme?
The ABC Company Childcare Voucher Scheme will close to new entrants at the end of March 2018. If you are not a member by the end of March, you will only be able to join the Government’s Tax Free Childcare Scheme. If you choose to leave the ABC Company Scheme at any point after March 2018, you will not be able to re-join.
The Government has not indicated that the Income Tax and National Insurance relief provided under the ABC Company Scheme will change. Therefore basic rate taxpayers will continue to benefit from a 32% saving on the cost of their vouchers, higher rate tax payers will benefit from a saving of 42% and additional rate taxpayers will save 47%.
How does the Government Tax Free Childcare Scheme work?
Parents will pay directly into the Government Tax Free Childcare Scheme from their take home pay, rather than by having a deduction through Payroll. For every £8 paid into the Scheme, the Government will top this up with £2, providing a 20% contribution towards the cost of your childcare. Parents can contribute up to £8,000 per annum, per child, into the Scheme and therefore the maximum Government contribution per child is £2,000 per annum.
In order to qualify for the scheme, each parent must be earning at least £120 per week and less than £100,000 per annum. The maximum age for a child in the scheme is 12 (17 if registered disabled). Parents who are in receipt of Tax Credits or Universal Credit are not eligible to join, however, as with Childcare Vouchers, the Government Tax Free Childcare Scheme can be used alongside the 15/30 hours of free childcare parents may receive.
What are the advantages of staying in the ABC Company Childcare Voucher Scheme?
The value of Childcare Vouchers is deducted from your gross pay by salary sacrifice each month, which means you benefit from Income Tax and National Insurance relief on the value. Please see the below example of how much £2,916 vouchers per annum will cost you in both the ABC Company Childcare Voucher Scheme and the Government Scheme, if you are a basic rate taxpayer:
Using the above example, the annual saving in the ABC Company scheme is £349.92 higher than the Government scheme. Both parents can also be members of employer sponsored schemes, therefore if your partner has access to Childcare Vouchers at work and you are both basic rate taxpayers purchasing the maximum available under the scheme (£2,916), the total saving would be £699.84 higher than the Government Tax Free Childcare Scheme.
How do I know which Scheme is best for me?
The Government has produced an online calculator, so parents can work out which scheme is more financially beneficial to them. You can access the calculator at https://www.gov.uk/childcare-calculator. It should be noted however, that if you do not join or you choose to leave the ABC Company Scheme after March 2018, you will only be eligible for the Government’s Tax Free Childcare Scheme. It is therefore important to consider both your current and future circumstances now.
How do I join the ABC Company Scheme?
All employees have one final chance to join the ABC Company scheme before it closes to new entrants, as long as you have an eligible child*. Please contact insert HR contact if you wish to join the Scheme and they will arrange for your membership to be established. The deadline to request a change is insert date relevant to March payroll cut off deadline.
*Further details included in link to Government online calculator above
This communication has been drafted in line with Finch Employee Benefits’ (FEB) understanding of the change. FEB are not tax advisers and accept no liability for any decisions made by employees on the basis of this information. We strongly recommend that employers highlight the need for employees to source independent specialist advice specific to their own circumstances if they are unclear on the options available and their impact.