No Image Available

Annie Hayes



Read more about Annie Hayes

Childcare vouchers: Advice is misleading, tax body warns


Employers are providing misleading advice, and many employees attracted by the new tax exemption for childcare vouchers will find themselves worse off, according to a leading tax body.

Childcare vouchers provided by employers are free of tax and national insurance up to £50 per week with effect from 6 April but many people taking the vouchers would be better off taking a cash alternative, the Low Incomes Tax Reform Group (LITRG) has warned.

The group said lower and middle income employees will have to be “most careful if they are not to be disadvantaged.” In a statement published last week, it claimed that the Inland Revenue has done “little so far” to explain the complexities of the new exemption, and called for the Revenue’s guidance to be made “more helpful and much less of a selling document for vouchers.”

LITRG has demonstrated 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,” it said.

LITRG wants “no individual to take vouchers without understanding the consequences of their actions.”

It added: “We also want employers to realise the damage that could be caused if the generous gesture does not look so generous when the employees feel the impact on their tax credits or related benefits.”

LITRG’s concerns were echoed by the TUC, which pointed out last week that while “less than five per cent” of UK employers give their staff financial help with the cost of childcare, employees who are fortunate enough to work for companies who do offer assistance, either in the form of childcare vouchers or via a place in a workplace nursery, could now “save money by opting into a salary sacrifice scheme.”

LITRG has now carried out a review of websites to see how well the disadvantages of vouchers are being recognised, and has found some employers’ guidance is “misinformed.”

Very few of the 50 websites of significant employers and major childcare voucher suppliers mention the “possible downsides” of their childcare schemes, LITRG said.

It added: “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)

Do the sums
Last week the TUC urged parents to weigh up whether or not it makes financial sense for them to join a salary sacrifice scheme and published advice and the new rules on its workSMART website.

TUC general secretary Brendan Barber said: “The Government should rightly be proud of its record on investment and support for childcare. [The] changes are another good example of their commitment to help working parents. Many people, especially higher earners will be quids in as a result of these tax and national insurance changes, but parents should do the sums first as not everyone will be better off. Parents on low pay may find that by signing up they will be short-changing themselves further down the line.

“Understanding what joining the new system of childcare support could mean for an individual’s current and future bank balances can be a complex exercise, but our online advice could help parents see more clearly whether or not this is for them.”

Revenue guidance
Guidance provided by the Revenue, available via its Childcare page, includes:

LITRG said: “Unfortunately the [Revenue’s] advice primarily concentrates on the tax and NIC savings and there are no worked examples showing how individuals can be much worse off by taking vouchers.”

‘Nasty surprise’
It claimed that sellers and providers of vouchers “similarly play down any risks to the tax credit claimant” and expressed concern that a significant minority of people may, through ignorance, have a “nasty surprise” awaiting them.

LITRG has illustrated the problem in three examples published on its website.

A detailed analysis of this and related issues by Elizabeth Lathwood, a technical officer for the Chartered Institute of Taxation, appeared in the March 2005 issue of the CIOT journal, Tax Adviser.

Andrew Goodall
Editor, TaxZone

Related items

No Image Available
Annie Hayes


Read more from Annie Hayes

Get the latest from HRZone

Subscribe to expert insights on how to create a better workplace for both your business and its people.


Thank you.

Thank you! Your subscription has been confirmed. You'll hear from us soon.