What's best for you? Introduction
Childcare vouchers of up to £55 a week or £243 a month, are a new way for employers to help their employees with the costs of childcare, for example; at day nurseries, with registered childminders, at before and after school clubs or holiday clubs. The employer needs to sign up with a childcare voucher company and you, as the employee, need to choose to sacrifice part of your salary to get the vouchers. You need to check that your childcare provider will accept the vouchers.
Example, Manchester City Council has recently chosen Leapfrog to provide a Childcare Voucher Scheme for its employees.
Childcare vouchers are exempt from tax and National Insurance Contributions, so they can help you to save money. In some cases, you could save more than one month's worth of childcare costs over a twelve month period.
But it is important to note that if you can get help with childcare costs through Working Tax Credit - and many working parents on low or middle incomes do qualify - you might be worse off under a childcare voucher scheme. Look at our examples to see how you may be affected.
Working Tax Credit includes a Childcare Credit, that offers another way to help with childcare costs. Her Majesty's Revenues and Customs calculates Child Tax Credit and Working Tax Credit together, if you apply for tax credits.
In addition, in some cases if you are on a low income, to opt for childcare vouchers may affect your future entitlements to benefits or pensions, like Statutory Maternity Pay or Paternity Pay.
So, it is important to know the full facts before you join a childcare voucher scheme. The calculations are not always easy to understand, but we'll explain the issues below.
Advice from Her Majesty's Revenues and Customs -three extracts from leaflets
Extract 1 from leaflet IR115 'Childcare provided by employers', (external link to a pdf document)
Childcare and how it affects tax credits
Childcare or childcare vouchers could affect the amount of tax credits that you are entitled to, particularly if you give up some of your salary to join your employers childcare scheme. You could end up with less money overall.
This is because you cannot include the childcare costs that your employer meets, either directly or through childcare vouchers, on your tax credits claim.
Extract 2 from Childcare - Tax Credits Guidance - Questions and Answers (external website)
Questions and Answers
Will I be better off accepting childcare vouchers in return for a salary sacrifice or by claiming tax credits help towards my childcare costs?
Your family will generally be better off accepting childcare vouchers in return for a salary sacrifice if you can answer 'yes' to one or more of the following:
- Your eligible childcare costs are more than £175 per week if you have one child or £300 per week if you have two or more children. In this case you will always be better off accepting childcare vouchers to cover your childcare costs above these limits, or
- You are receiving tax credits at the family element (£545 per year, or £1090 per year if you have a baby aged under one, April 2006 - April 2007 figures) or less and you are claiming for your childcare costs, or
- You pay tax on your earnings at the higher rate of 40%.
Your family will generally be worse off or, at best, no better off accepting childcare vouchers in return for a salary sacrifice if you can answer 'yes' to all of the following:
- You are receiving tax credits of more than £545 per year (or £1090 per year if you have a baby aged under one) (April 2006 - April 2007 figures) and you are claiming for your childcare costs, and
- You do not pay tax on your earnings at the higher rate of 40%, and
- Your eligible childcare costs are no more than £175 per week if you have one child or £300 per week if you have two or more children.
Extract 3 from Employer Supported Childcare and Tax Credits - how they interact (external website)
If you receive a childcare benefit from your employer in return for a reduction in salary your Child Tax Credit and/ or Working Tax Credit entitlement may be adversely affected if you receive more than the basic family element of Child Tax Credit of £545 (or £1,090 if you have a child aged under 1 year) and have claimed for the childcare element of Working Tax Credit. Qualifying childcare costs can increase the level of family income that qualifies for more than the basic family element of £545 (or £1,090) to up to:
- £37,500 where there is one child in the family;
- £54,400 where there are two children; and
- £59,000 where there are three children. (April 2006 - April 2007 figures)
If your qualifying childcare costs are within the childcare element limits of £175 per week for one child and £300 per week for two or more children, your family income is within the limits given (note these limits can be higher if your child(ren) has a disability) and your highest rate of tax is 22% (the basic rate) we recommend that you do not accept a childcare benefit from your employer in return for a reduction in your cash pay. This is because the amount of tax credits you are likely to lose may be equal to or greater than the amount of tax and National Insurance Contributions you will save.
A Note
Some families cannot claim help with their childcare costs through tax credits as they do not qualify for Working Tax Credit. These include:
- Two parent families where only one parent works, and the other parent is not 'incapacitated' (long-term sick);
- Single or two parent families where one or both parents work less than 16 hours per week.
In these situations, families with children can still claim Child Tax Credit. The basic family element of Child Tax Credit is due to all families with an income up to £58,000 per year. These families can also often benefit from taking childcare vouchers and a salary sacrifice.
Other Questions and Answers
Q: Where can I find a list of the main questions I should consider about childcare vouchers?
A: Look at the very useful website Worksmart from the TUC (external website).
Q: Can I take childcare vouchers if I would be left with less than the national minimum wage?
A: No, you cannot do this.
Q: If my cash pay is reduced, how will my other earnings-related payments be affected (pension, overtime rates, pay rises etc)?
A: Ask your employer.
Q: If my cash pay is reduced, will my State Pension, Statutory Maternity Pay or other benefits be affected?
A: Look at the very useful website Worksmart from the TUC (external website).
Q: If my cash pay is reduced, will my student loan repayments be affected?
A: Yes, you may be expected to pay out less, as your gross wage is reduced. Get advice, or see HMRC's advice for students (external website).
Practical Points - Tax Credits, Housing Benefit and Council Tax Benefit
If you get tax credits, you must notify a change in your qualifying childcare costs to Her Majesty's Revenues and Customs (HMRC), if your qualifying childcare costs decrease to nil or by £10 a week or more. If you accept childcare vouchers, you must inform HMRC to amend your tax credits. You must do this inside three months, or, from November 2006, inside four weeks.
If your family income decreases then you are not required to inform HMRC of the change immediately, but you may wish to notify changes of income quickly to get any increased tax credits sooner rather than later.
If you get Housing Benefit or Council Tax Benefit, you need to inform your local Housing Benefit Office promptly in writing - inside a month - about the change in your childcare costs and arrangements and the changes in your salary and tax credits. Changes will have a knock-on effect on your entitlements. If you want to check if you may be entitled to these benefits, get advice.
Live in Manchester? Need advice about Childcare Vouchers? Send us an email or book an appointment with the Online Adviser.
Need more help? Live in Manchester? Send us an email
Information Provider:
Manchester Advice
Date Written:
17 July 2006
This information is for guidance only and is not an authoritative statement on the law. Please read our Terms and Conditions.
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