Gordon Brown's announcement on Childcare Vouchers -
13.10.09
Gordon Brown's announcement on Childcare Vouchers
On Tuesday 29th September in his speech to the Labour Party Conference Prime Minister Gordon Brown made the announcement of the extension of free childcare places. While initially this was welcomed what has now become clear is it would be funded by phasing out tax relief on Employer Supported Childcare over the next 6 years.
Childcare Vouchers benefit nearly 350,000 hard working parents by providing a means to pay towards their childcare costs. A benefit that the governmens's own reports concluded:-
The government itself recognised the value of childcare vouchers in their recent review of the 10 year childcare strategy: "Employer Supported Childcare (ESC) is a popular scheme that offers substantial tax and National Insurance savings for both employees and employers when an employer signs up to offer childcare support. This is most often through vouchers. ESC does not only provide financial help with the costs of childcare. It also has wider benefits for all involved, including improved staff retention, reduced absenteeism and a more motivated workforce.
Contrary to Gordon Brown's statement that this is a benefit for the rich, research carried out by NatCen Research for HMRC in 2006 indicated that over 60% of employees who benefited from Childcare Vouchers are standard rate tax payers and HMRC have no empirical data that supports the Prime Minister's comments.
What it means for you and your employees:
» Paying for quality childcare is a substantial cost for families with young children. For many, the ability to afford childcare services (either in a day nursery or from a childminder) is a key factor in deciding whether to return to work, or come off unemployment benefits.
» Annual research conducted by the Daycare Trust demonstrates that the current average cost of a full-time nursery place for a child under two is £167 a week in England (over £8,500 a year), rising to £226 a week (£11,752 per year) in Inner London, a rise of nearly 5% on 2008's figures.
» If two parents are claiming tax relief via childcare vouchers, this could represent a maximum saving of £2,390 (if they were both higher rate tax payers) per household per year. Cutting tax relief for childcare vouchers, would therefore increase their childcare costs by 28% (as a proportion of the average yearly cost of childcare).
» The number of parents currently using childcare vouchers is now at approximately 330,000, up from 55,000 in April 2005, also an increase of more than a factor of 6, highlighting the popularity and value of the benefit.
» If an employee is currently taking their maximum allowance of £243 per month of Childcare Vouchers and thereby saving their family £900 per year in tax and NI savings, then based on the average UK hourly wage of £12.62 (2008) they would have to work the equivalent of nearly 2 additional weeks per year to earn the funds to meet their existing childcare commitments.
» Furthermore, initial responses to Brown's plans on children and family networking sites, the BBC comment pages, and our own market research makes it clear that the plan to scrap this benefit has led to a number of parents suggesting this may cause them to reassess their working habits and potentially reduce working hours to save on childcare costs. It simply follows that less working hours = less Income Tax and National Insurance contributions for the Treasury coffers. Furthermore, in some cases where both parents are benefiting from childcare voucher savings it will mean a working family having to find an additional £2000+ per year to pay towards their childcare costs, arguably leading to reduced spend in other areas that generate VAT income.
On the surface this may appear to be a populist policy, in reality the evidence points to it hurting average hardworking families who are trying to balance good quality childcare with the reality of having to work to pay day to day bills.
Proposed Timescales:
» 1. Employees who began their contractual right to receive childcare vouchers prior to April 2011 will continue to enjoy the exemptions on vouchers provided to them (under the same contract) up to 2015.
» 2. Employers who provide childcare vouchers to an employee under a related contract of employment which was initiated or modified after April 2011, will not be in a position to apply the current tax & NIC exemptions to that childcare vouchers benefit.
» 3. An employer may introduce a childcare voucher scheme at any point between now and 2011 and an employee may choose to receive childcare vouchers at any point between now and 2011 to enjoy the exemptions until 2015.
» 4. Employers may choose not to introduce any new childcare vouchers scheme after April 2011 as they would not enjoy the exemptions for any vouchers provided thereafter.
On the assumption that this Government announcement will actually take effect (as opposed to being abandoned due to adverse public opinion and/or the forthcoming general election) the first change is 18 months away, and the main change approximately 5.5 years away.
Alan Fergusson
Employee Benefits Director