At last it seems the Government is recognising that the high cost of good quality childcare can be a barrier to parents who want to return to work or increase their working hours after having children. Since 6 April, new tax breaks have been introduced for employers to help them provide childcare benefits for their staff. But will they help everyone?
Assistance is already available to low-to-middle-income families through the tax credits system. The childcare element of working tax credit provides help of up to 70 per cent of the cost of registered or approved childcare up to maximum limits. From 6 April the limits are 175 for one child and Pounds 300 for two or more children. And the level of help will increase further in April 2006, from 70 per cent to 80 per cent of childcare costs.
But the Government also recognises that even relatively high-earning families can still find it difficult to meet childcare costs, which can be as much - or even more - than a mortgage. And with some 40 per cent of employees having dependent children, and one in four women returning to work full-time within a year of having a baby, access to good quality, reliable childcare is essential.
This is where the Government feels that employers have a part to play. As an incentive to encourage more employers to offer childcare help to their staff, the Government is introducing new rules as of this month. This will make employers' support more tax-efficient.
The new childcare tax breaks will apply when an employer gives their employee a non-cash childcare benefit. If the qualifying conditions are met, the benefit that would otherwise be taxable and liable for National Insurance Contributions (NICs) will be exempt from both. This applies within a set limit.
The set limit is the first 50 a week and the main qualifying conditions are that the childcare used by the employee is either registered or approved and that the employer offers the benefit to all of his or her employees. The sort of non-cash benefits that are within the scope of the new exemption are employer-provided childcare vouchers and childcare bought by the employer from a third-party childcare provider - for example, if the employer pays for a place at a commercial nursery.
The tax break will not apply if the employer gives a cash allowance or pays the employee's own childcare bill, and no tax relief is due for childcare costs that parents pay themselves.
I am often asked questions about 'salary sacrifice', in particular whether people have to set up these sorts of arrangements in order to benefit from the exemptions. The answer to this is no - the tax and NICs rules relate to the benefit that is provided, not how it is provided.
Salary sacrifice is an option that employers might decide to offer if they want to give a tax and/or NICs-free benefit but don't want to increase their overall costs of employment. It is simply an agreement between an employer and an employee that the employer will give the benefit, but only in return for a corresponding reduction in the employee's cash pay.
Of course, employers don't have to offer benefits only in return for a cash pay cut - they can offer them in addition to an employee's normal salary.
This is the best way for employers to help with childcare costs, as it means that the saving the employee makes is the whole amount of the extra benefit given.
So, if an employer gives an employee 50 a week in childcare vouchers on top of what they would normally pay them, the employee benefits by 50 a week. If the benefit is offered in return for a salary sacrifice, the saving the employee makes is limited to the amount of tax and NICs they would have otherwise paid on their higher cash salary.
Further information
* For tax and NICs information visit: www.inlandrevenue.gov.uk/childcare. The Tax Credits Helpline can give you advice on your tax credit entitlement. It is open from 8am to 8pm seven days a week, in Great Britain on 0845 300 3900 (text phone 0845 300 3909) and in Northern Ireland on 0845 603 2000 (text phone 0845 607 6078). Or go online at www.taxcredits.inlandrevenue.gov.uk
