Tax-Free Childcare Scheme
The Government already offers tax and National Insurance exemptions through two childcare schemes that impact on the employer:
Employer-Provided Childcare
From 06 April 2005, there is a total tax and NICs exemption on the provision of workplace nurseries that meet the prescribed criteria (as defined in Section 318 of the Income Tax (Earnings and Pensions Act) 2003).
Employer-Supported Childcare (ESC)
From 06 April 2005, there is a partial exemption on other childcare provisions, including vouchers, where the provision meets the prescribed criteria (as defined in Section 318A of the Income Tax (Earnings and Pensions Act) 2003). These conditions include the maximum allowable tax and NICs exemption of £55 per week and the requirement to perform the Basic Earnings Assessment for people entering into an ESC scheme on or after 06 April 2011.
On 19 March 2013, the Prime Minister and Deputy Prime Minister announced the introduction of a new Tax-Free Childcare scheme from 2015 which will be available as a means of government-supported childcare. It will not replace the Employer-Provided workplace nurseries regime; however, will impact ESC schemes, most commonly the Childcare Voucher.
On 05 August 2013, HM Treasury and HMRC launched a Consultation looking at the design of the scheme and how it will work in practice. The document starts, importantly, with the statement that this is a scheme designed to support childcare costs for those in work. It is not designed for people who are in receipt of support that is available through the Working Tax Credit or, eventually, the Universal Credit. The Government recognises that the current ESC regime provides support and works well. However, a significant limitation is that not all employers offer this, its availability is linked to the parent and not the number of children and it is unavailable for the self-employed. Further, people earning at the National Minimum Wage are unable to access the scheme, as participation would send their hourly rate below this minimum threshold. The universal Tax-Free Childcare scheme would address these limitations plus encourage people back into the workplace, a fundamental Government objective.
The new scheme will impact employers and the payroll profession, simply because of the interaction with the Childcare Voucher scheme. Therefore, we are detailing this below, though the Consultation Document is clear that ‘employers will not be mandated to play a role in Tax-Free Childcare.
Tax-Free Childcare Conditions
To be eligible for the new scheme:
Children must be under the age of 12 or disabled children under the age of 17
both ‘parents’ (or the lone ‘parent’) must be in work
the family will not be receiving childcare support via either the Working Tax Credit or the Universal Credit
annual earnings must be less than £150,000, i.e. for a couple joint income must be less than £300,000
Parents on paid sick, maternity, adoption or parental leave will continue to qualify for Tax-Free Childcare for the number of eligible children before they began their leave period. Unpaid periods of parental and sick leave will not qualify for Tax-Free Childcare. Chapter 3 of the consultation discusses the above in further detail.
Tax-Free Childcare – the Workings
the Government will give tax relief at the Basic rate of tax, currently 20%, on the first £6,000 of childcare costs, per child
parents will open an online account and for every 80p the parents contribute, the Government will top this up with 20p, up to a maximum of £1,200 (i.e. £6,000 at the Basic rate of tax). This will be converted to a voucher that is then given to the childcare provider in exchange for childcare provision
whilst current tax (and NICs) relief is given in accordance with pay frequency, the Government asks whether monthly payments to voucher accounts would be more appropriate, though it recognises that cashflow, reliability and fast payments are essential for the scheme to work
the scheme will be available to families in England, Scotland, Wales and Northern Ireland to childcare providers who meet the relevant registration requirements in those countries
the new scheme will commence in Autumn 2015 covering children born from September 2010, i.e. younger 5-year olds and those under 5 years of age in the first year, and disabled children under the age of 17
eligibility to join the Tax-Free Childcare scheme will increase by one year each year to include children under 12 and eligibility will end in the September following the child’s 11th birthday (16th birthday for disabled children)
the current ESC voucher scheme will remain available for current members if they chose to stay in it, however, new entrants will only be able to claim support through the Tax-Free Childcare scheme once it is available. An employee in the existing ESC scheme will be able to move to the Tax-Free Childcare scheme (but they will not be able to move back into it)
Comment
The initial timetable for delivery of the new Tax-Free Childcare scheme proposes that legislation passes through Parliament before the General Election in May 2015. The period before this and up to its planed implementation in autumn 2015 involves much work with interested parties and system design and specifications, essentially for Government systems, ensuring that the scheme works as planned. Employers as well as parents are advised to look at and respond to this Consultation. We fear that it may have implications on the employer and payroll / HR professions, even though the document says that this will not be the case.
The consultation closes on 14 October 2013. However, the consultation questions are available to answer using an online questionnaire and this format closes on 27 September 2013.
Further Information
Gov.Uk Website – Written Statement to Parliament 16 July 2013
Gov.UK Website – Tax-Free Childcare: Consultation on Design and Operation (Closes 14 October 2013)
Surveymonkey.com Website – Tax-Free Childcare Online Consultation (Closes 27 September 2013)
Payroll Help 21 March 2013 – Budget 2013 Tax-Free Childcare Scheme
Payroll Help 14 May 2013 – Queen’s Speech 2013
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