Employees who joined their employer’s childcare voucher or employer-supported childcare scheme before 4 October 2018 can remain in that scheme and benefit from the associated tax relief for as long as the employer continues to offer it. However, this may not always be the best option for the employee – depending on their circumstances they may be better signing up to the Government’s top-up scheme instead.
Tax relief for employer-provided vouchers
Employees who joined an employer childcare voucher scheme or directly contracted childcare scheme prior to 4 October 2018 can continue to receive the associated tax relief. Vouchers or directly-contracted childcare are tax and National Insurance free up to the exempt amount. This depends on when the employee joined the scheme and, where the employee joined the scheme on or after 6 April 2011, the rate at which they pay tax.
The exempt amount is set at £55 per week where the employee joined prior to 6 April 2011; for employees joining after that date, the exempt amounts are £55 for basic rate taxpayers, £28 per week for higher rate taxpayers and £25 per week for additional rate taxpayers (ensuring the relief is worth £11 per week to all taxpayers).
Each employee is only entitled to one exempt amount to cover childcare vouchers and directly-contracted care, and regardless of how many children they have. However, each parent can benefit from their own exempt amount.
Childcare vouchers and directly-contracted care can be provided via a salary sacrifice or other optional remuneration arrangement without triggering the alternative valuation rules. This means that the tax exemption is preserved where provision is made in this way.
Under the Government scheme, parents can open an online account and receive a tax-free top up of 20p for every 80p that they deposit into the account. The maximum top up is £2,000 per child per tax-year. The Government scheme cannot be used in conjunction with universal credit or tax credits.
Which scheme is best?
Parents cannot benefit from both the employer scheme and the Government scheme, so must choose which is best for them.
Where the employee joined the employer scheme on or after 6 April 2011, the tax relief from employer scheme is worth £11 per week (£583 per year (based on 53 weeks) if one parent receives the vouchers and £1166 if two parents do.
Under the Government scheme, the parents would need to contribute £2332 to receive a top-up of £583 and £4664 to receive a top up of £1166. To benefit from the maximum £2,000 top-up, the parents would need to contribute £8,000.
There is no substitute for crunching the numbers – parents should consider both options and decide what is best for them.