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Steve Herbert

Jelf Employee Benefits

Head of Benefits Strategy

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Analysis: Government changes to childcare vouchers

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Following months of negotiation between the coalition parties, the recent Budget statement included an announcement regarding the future of Childcare Vouchers.

Childcare vouchers are now likely to undergo changes from October 2015.

So why is change happening, what does it mean for employers and employees, and should your company cease to offer this benefit in light of the proposed changes?

To understand this, it's useful to understand the drivers that made Government support for childcare costs come into force. Cast your mind back to the early years of the last decade. The economy was growing and there was a war for talent among employers.  There were, therefore, plenty of new job placements available to parents who wanted to get back into the jobs market.

One barrier to this was the cost of childcare. With the cost of childcare at several pounds per hour, it was often hard for a minimum wage employee to financially justify a return to the workplace.  So many such individuals had no choice but to remain out of the jobs market.

And this in turn impacted on HM Government’s finances. In the end it came down to this: it’s better to have someone in the workplace paying some level of taxation, rather than out of the workplace and paying nothing. There was therefore an incentive for the Government to offer some additional financial support to encourage parents back into the workplace, and Childcare Vouchers were a solution to this issue.  Each working parent could benefit from an annual allowance of tax-free voucher savings, with these vouchers then used to fund childcare from registered providers.

All very positive, and a good idea. Yet the access-point for parents to obtain this benefit was only via the employer.  And today, around a decade after the launch of Childcare Vouchers, many smaller employers are yet to offer this benefit to staff, leaving many parents without access to this support.

The main thing that's changing

Which takes us back to George Osborne’s proposed changes. It is suggested that, from 2015, all working parents will be able to register directly with a voucher provider to gain access to government financial support for childcare. Or to put it another way, Childcare Vouchers will no longer be part of an employer’s benefit offering.

So this is clearly a step forward, as it means that access to Government support will now be more widely available. 

Following the budget announcement, our research found that 36% of employers who currently offer Childcare Vouchers as a benefit were considering scrapping their scheme before 2015. This seems strange given that the reforms are still more than two years away.

So why are employers thinking about removing childcare vouchers early?

Some employers perceive the benefit to be sexist (which it isn’t, both or either parent can currently utilise Childcare Vouchers), others consider it discriminatory, as by definition it only favours employees with children. True, but hardly a major issue, surely?   

Cost and administration are sometimes cited as drivers. The former objection is unlikely (as the mechanism for accessing Childcare Voucher’s actually creates an employer’s National Insurance saving), and the administration is often automated and light-touch.

The only objection which would appear to hold water is that of maternity benefits. Childcare Vouchers are a benefit where the employer may have to shoulder the costs throughout maternity leave. Yet the amounts involved are often not that substantial in pay and benefit terms, and in any case capped by the limits the Government imposes on the offering. 

So the rationale to remove Childcare Vouchers early seems a little strange. And there are some other factors employers should perhaps consider also.

For a start, there are some significant differences between the current offering, and that proposed from 2015. For instance, the replacement scheme is only proposed to offer financial support for under-5s childcare at outset, whereas the current system provides support for most school-age children, and can also be used for after-school clubs.

Another key difference seems to be driven by family status. The “traditional” family of two parents, with only one earner, will be excluded from accessing the new benefit, whereas the current system allows that same family some support. 

So it’s likely that there will be losers as well as winners from the proposed system. And to deflect this concern, it has already been suggested that employees who will lose out under the new system, will be able to retain their rights up to, and beyond, 2015.  But they will only be able to do this if their employer allows them to carry on saving until that point. 

Removing Childcare Vouchers early would condemn both the above groupings to never again being able to claim the assistance. This would surely be bad news for employee engagement and recruitment and retention. 

But let us not forget the reason that Childcare Voucher exist at all.

According to the Joseph Rowntree Foundation, the cost of childcare has increased by a staggering 37% in the last 5 years. This, during a period when pay rises are at a premium. The Office of National Statistics found that last year represented the lowest increase in average weekly wages since 2001, at only 1%. It’s clear that the gulf between what childcare costs, and what many households can afford, is widening. It therefore follows that the need to continue offering this benefit is still real.

Or to put it another way, remove this benefit now, and it’s quite possible that some of your employees may be forced to re-evaluate whether they can financially afford to continue in work. 

So do think carefully if you are considering removal of the Childcare Voucher offering before the replacement scheme is available. Few employers would want to be accused of being insensitive to their financial needs of their workforce, or placing that final straw on their employees’ backs.

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Steve Herbert

Head of Benefits Strategy

Read more from Steve Herbert
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