Tax Free Childcare: an HR guide to the new system and why more parents will be affected than originally expected

James Malia, Director of Employee Benefits, Sodexo Benefits and Rewards Services discusses that since the Government has changed the way it’s rolling out Tax Free Childcare, more parents will be affected than originally thought.

The Government has just rolled out its Tax Free Childcare scheme (TFC), but many working parents will be unaware that this change could impact them sooner rather than later. As part of the launch, the Government has announced that children up to the age of four, rather than the expected age of two, will be the first group of parents that TFC will be rolled out to, which means that this move will affect many more families than employers were originally expecting. So what does this mean for HR departments and working parents?

 

What this means for parents

Since 2005, employers have provided parents with Childcare Vouchers (CCVs) generally through a salary-sacrifice scheme. The Government is replacing this system with Tax Free Childcare, managed by parents themselves, as opposed to employers. The new system was scheduled to roll out in the Spring of 2017 for children up to two years of age, but this threshold has now been raised to include children up to four. As a result, parents need to decide what they should do: choose CCVs or go for TFC?

CCVs currently help around 780,000 working parents save up to £933 of tax and NI on their childcare costs per year. As more than one parent can sign up to the scheme, this means that savings can go as high as £1,866 per family per year.

Based on a Sodexo survey, CCVs cover an average of 54% of a family’s childcare costs for children up to the age of 15. In contrast, TFC is designed to save parents up to £2,000 per year per child for children up to the age of 12, but in reality the average saving has been estimated at just £800.

However, it’s not merely the cost differences that parents and employers need to be aware of but, more crucially, the eligibility. To state just a few of the key differences: only one parent needs to be working to sign up for CCVs, whereas both parents must work to claim TFC; self-employed parents cannot claim the current CCVs, but could be eligible for TFC; parents in receipt of tax credits are not permitted to claim TFC, whereas they can be in receipt of tax credits and childcare vouchers, albeit, the amount of tax credits will be reduced; CCVs are available for children up to aged 15 but TFC, even after full implementation, will only apply to those up to age 12.

 

How will it impact different families?

There will be some families that benefit from this roll out strategy and others that will lose out; crucially it is the ‘modern family’ that’ll be disadvantaged the most.

The stereotype of a stay-at-home mother looking after 2.4 children can no longer be seen as a ‘normal’ family dynamic; the modern family could well be single parents, three or more children, and up to four co-parents – ultimately, anything is possible.

Each case must be taken on an individual basis, but research of over 10,000 parents from our childcare calculator gives a strong indication of how this change will affect families, and who may be better off on which scheme.

  • 55% of single parents are better off with CCV
  • 66% of working couples are better off with CCV
  • 78% of basic tax rate households are better off with CCV
  • 73% of families with one child are better off with CCV
  • 57% of families with two children are better off with CCV
  • 57% of families with three children are better off with CCV
  • 74% of families with two children and two higher rate taxpayers are better off with TFC

 

The important point to note is that where an employee leaves the CCV scheme in favour of TFC, they will be unable to re-join the CCV scheme even if their circumstances change in the future.

 

What this means for HR

First and foremost, the HR department needs to be up to speed on these changes and how they will impact their own workforce. After all, even though the responsibility will move from the employer to the parent under TFC, HR will ultimately be the first port of call for any confused employees.

The current CCV scheme is managed by employers through salary sacrifice, but the new TFC scheme will take the management of childcare support away from employers and into the hands of parents themselves.

For their part, businesses also need to recognise their role in educating staff on the decisions ahead and use this as an opportunity to showcase how an informed employer can enhance employees’ lives both in and out of work.

 

More support for working parents?

The current drive to get parents back in to work needs to be considered alongside these changes to childcare financial support. Employers need to prove they are a working-family friendly business with flexible employee benefits schemes and the wider culture of the business. Benefits that can help to keep more money in parents’ pockets will always be welcome, including perks like low emission vehicle finance schemes, pensions and access to discount shopping. From a cultural point of view, a re-immersion scheme as parents return from leave, flexible working and an acceptance of ‘care’ duties will prove to parents that the business understands the realities of family life.

In the short term, getting up to speed on the new Tax-Free Childcare roll out is a necessity, but a longer term strategy to prove loyalty to working parents will add enormous value to the business.

Author: Editorial Team

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