Plans to phase out tax relief on Childcare Vocuhers

The Prime Minister, Gordon Brown announced his intention to phase out tax relief on Employer Supported Childcare over the next 6 years at the recent Labour Party Conference in Brighton.

Proposed changes summary

The Government’s ‘Employer Supported Childcare’ program was boosted in 2005 when the tax and NIC treatment of related employee benefits was changed – by increasing the level of the exemptions available to employers and employees.

Childcare vouchers are part of that Employer Supported Childcare when provided as a contractual benefit to a working parent, and when meeting the qualifying terms regarding the parent (employee), child and carer. Gordon Brown’s recent announcement proposes the staged removal of all income tax and National Insurance contributions (NIC) exemptions related to Employer Supported Childcare.

Hundreds of thousands of working parents make savings on their childcare costs each year and in some cases these savings are the deciding factor in whether it is financially worthwhile for them to go to work.

The Government’s announcement refers only to the tax and NIC treatment of that contractual benefit - not to the actual vouchers or their ongoing availability to working parents. However, the removal of the tax and NI relief means there would no longer be a financial advantage to a working parent in receiving that benefit as salary sacrifice, nor to an employer to offer the benefit.

How does this affect you and when?

The Government’s announcement refers to two separate changes, at different dates. Please note that the following points are assumptions at this early stage, and that further information can be expected in November 2009 in a planned pre-budget announcement.

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. This means if you sign up now, you will still receive tax and NI relief until 2015.

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.

An employer may still 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.

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.

If this Government policy announcement actually takes effect (as opposed to being abandoned due to adverse public opinion and/or the forthcoming general election) the first change is 18 months away, i.e. April 2011 and the main change over 5 years away.