No Image Available

Pam Loch

Read more about Pam Loch

Childcare vouchers: Parents and employers need a break


Businesses were recently advised to withdraw from the government’s childcare vouchers scheme, as a result of an equal opportunities European ruling last year. Pam Loch and Wendy Hayes explain where this leaves employers now.

Since the birth of the childcare voucher scheme in 2005, around 20% of employers have set up arrangements for their employees enabling them to sacrifice part of their salary in exchange for vouchers. Employees with parental responsibilities can claim up to £243 each month, free of tax and national insurance contributions under the scheme. Recent changes to legislation however have thrown into doubt the benefits for employers in operating the scheme.   

How it works

The scheme works by converting taxable pay into tax-free vouchers, saving employees up to £1,196 a year. Sacrificing part of their salary means that this is also a tax-efficient way of providing the benefit because national insurance contributions are based on the lower sacrificed salary, creating a saving for the employer as well.

The pros and cons

Until July 2008, most employers and employees thought the scheme was all pros and no cons. However the maternity and parental leave regulations were amended as a result of a European ruling on a case brought by the Equal Opportunities Commission against the UK government. In addition, in October 2008, amendments to the Sex Discrimination Act 1975 removed the distinction between ordinary maternity leave and additional maternity leave.
As a result of these changes, employees on maternity leave became entitled to all their normal contractual employment benefits (apart from remuneration) for the full period of possible maternity leave of 12 months and not just the ordinary maternity leave period of six months.

Where do the changes leave us now?

Employees still remain entitled to statutory maternity pay (SMP) for a total of 39 weeks. For employees who qualify, SMP is paid for the first six weeks at 90% of the average gross weekly pay (uncapped). For the remaining 33 weeks they are entitled to a lower rate of £123.06 or 90% of the average gross weekly pay.  The definition of remuneration has not changed and it remains defined as ‘wages and salary’.
This, however, raised the issue as to whether childcare vouchers are a benefit or remuneration. If they are considered a benefit, the employer would have to provide vouchers during maternity leave. HM Revenue and Customs’ view is that there is no doubt the provision of childcare vouchers is a non-cash benefit, rather than remuneration.   

Impact of the changes

Employers are now left in a situation where they could be required to provide vouchers during unpaid maternity leave. The majority of employers can recover 92% of SMP from the government through the NI/PAYE system. Small businesses whose annual national insurance contributions are less than £45,000 are able to get 100% reimbursement of SMP. However they can only reclaim pay and not childcare vouchers are not recognised as pay by HMRC.  
Employers providing contractual maternity pay above statutory maternity pay can deduct the value of the vouchers from maternity pay, providing the actual amount of pay does not fall below statutory maternity pay.
The Daycare Trust has urged the government to reconsider their position on this as many employers are considering withdrawing the benefit over concerns that it will cost them money. The Daycare Trust says businesses are being advised by the British Chambers of Commerce (BCC) to withdraw from the government’s childcare vouchers scheme because of the adverse affect of the changes made to benefits being provided during additional maternity leave would have on employers. If employers do withdraw the benefit, it would be detrimental for the employee who could stand to lose out on hundreds of pounds worth of tax breaks.
A policy advisor for the BCC explained that "…before the change in the law in October we would have told our members to go out there and offer the childcare voucher scheme as a benefit to their employees…. but with the change in the law employers can now be liable in certain circumstances for the cost of the vouchers….. employers are naturally risk-averse and we would not recommend now that they use the vouchers in case they did become liable for the cost".

What should employers do?

Employers should carefully consider their position before taking any steps to withdraw the benefit. Depending on how the benefit is provided for in the employee’s terms and conditions, the employer could be exposed to claims. For example, withdrawing the benefit could be a breach of contract or it could lead to employees trying to argue they have been subjected to unlawful discrimination. 
Many employers recognise that the scheme has proved popular with existing staff and is seen as a useful tool for recruitment and retention. However if employers are faced with extra costs while an employee is on maternity leave, the issue of affordability could begin to outweigh the benefits from funding the benefit. Before making any decisions employers should also consider the possible negative impact withdrawing a benefit can have on employee morale and loyalty going forward.
The Department for Business, Enterprise and Regulatory Reform (now known as BIS) believes that providing contractual benefits via salary sacrifice can have real benefits for businesses. Their new guidance on the changes is due to be published over the next few months. Employers, therefore, may want to hold fire for now and revisit this benefit again at that point.   
Pam Loch and Wendy Hayes are from employment law firm, Loch Associates 

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.