After child benefit, could better off families now lose their child care vouchers?

15th February 2013

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Childcare costs are probably the biggest expense most parents will face – until their children start school at least writes financial journalist Jill Insley.
The insurer LV (LV.com) calculates that childcare from birth to age 18 costs nearly £64,000 – but bear in mind that this is an average figure. You can easily pay up to £30,000 a year for a full time nanny, according to parents on Mumsnet.

So reports in the Financial Times (Ft.com) that the UK’s highest earners – those earning in excess of £150,000 – could be excluded from valuable childcare tax benefits will prove a significant blow to those whose children still need full time care, or care after school and during the 13 long weeks of holiday each year.

The proposal comes just weeks after the removal of child benefit – worth £20.30 a week for the first child and £13.40 a week for subsequent children in the 2013/14 tax year – from parents earning more than £50,000. The cutback means a family with three children could lose out to the tune of £2,450 a year, according to research by Capital Economics.

The Liberal Democrats have insisted that, in plans still under consultation, the highest earners will not be eligible for childcare vouchers when the scheme is relaunched to provide families with a tax break worth up to £2,000 per household. Instead the Liberal Democrats are calling for a separate support package will be developed to help those who are unemployed or receiving tax credits and therefore unable to benefit from the childcare voucher scheme.

In an email to his supporters, deputy prime minister Nick Clegg said: “If we want to help the working families who struggle with childcare costs, as I do, then we don’t need to help people earning hundreds of thousands of pounds a year. But we do need to help families on middle incomes, especially those with very young children who don’t yet qualify for the free hours that start at three years old.”

Childcare vouchers are bought by about 400,000 parents working for some 50,000 employers, according to the Childcare Voucher Providers Association (CVPA). About 80 per cent are basic rate taxpayers and 20 per cent higher and additional rate payers. The vouchers are bought through employers out of pre-tax income through salary sacrifice, enabling those whose salaries just take them above the £50,000 child benefit threshold to drop below and continue claiming the extra money.

The maximum value of vouchers a basic rate taxpayer can claim is £55 a week, or £243 month, saving families on basic rate tax up to £933 a year in tax and National Insurance if one parent buys them or £1,866 a year if both are buying.

Higher-rate tax-paying parents who joined a scheme from 6 April 2011 onwards can claim £28 a week or £123 a month each, save up to £624 a year each in tax or £1,248 for a working couple. Additional rate payers can claim £97 a month, rising to £110 when the tax rate drops to 45% in April, producing a tax and NI saving of £608 a year.

While the amounts may seem very low compared to care costs for a baby or toddler in particular, the vouchers can be used until the child reaches the age of 15 (16 if they are disabled) and can be used to pay for before- and after-school care and holiday clubs as well as nurseries, creches and child minders, so long as the childcare provider is registerd with Ofsted. Over 15 years even £608 adds up to more than £9,000.

Julian Foster of Computershare Voucher Services, a firm which provides vouchers schemes to employers, says the Liberal Democrats’ plans are likely to have little impact on additional rate tax payers as only 1 per cent of those buying vouchers pay the highest rate of tax.

He says: “I can understand why a government struggling to save money would look to cut this tax benefit from the highest earners in the UK. But it’s not going to save the government that much money because so few additional rate tax payers actually buy the vouchers. The saving will be in the thousands, not millions, of pounds.”

The CVPA has suggested improving rather than scrapping the existing voucher scheme by introducing a “right to request” for employees whose companies do not already offer childcare vouchers, mirroring the provisions put in place around flexible working. It also suggests extending the scheme to the self-employed, who are currently unable to benefit from vouchers.

It says: “The voucher scheme is simple, efficient and does not place any administrative burden on the Government, so implementing these changes would not add any overhead costs for the taxpayer. In contrast, any new tax break scheme is likely to bring more people into the self-assessment regime.”

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