How do Childcare Vouchers work?

This article explains what Childcare Vouchers are, and how the scheme can benefit working parents and their employers. It is important to note that the scheme closed to new entrants in October 2018. However, existing users can continue to benefit for as long as they remain eligible.

At a glance

• Employees exchange (salary sacrifice) part of their pre-tax salary for Childcare Vouchers
• The full amount is exempt from tax and National Insurance meaning the employee can save up to £933 per year
• The employer also saves on employer’s National Insurance Contributions
• Parents have an online Childcare Voucher account which they can use to make payments to their registered childcare provider
• Childcare Vouchers are only available to employees (not the self-employed) who had already joined the scheme by October 2018 and who continue to remain eligible.

How do employees save money?

Childcare Vouchers typically operate through salary sacrifice.  A salary sacrifice arrangement is an agreement by an employer to reduce an employee’s cash pay, usually in return for a non-cash benefit. Under the Childcare Voucher scheme employees may ‘sacrifice’ part of their pay in exchange for Childcare Vouchers. This means employees do not pay tax and National Insurance Contributions on the Childcare Vouchers which can only be used to pay for registered childcare.

Each eligible parent can sacrifice up to £243 (depending on their tax band) from their salary per month into their Childcare Voucher account. This saves them up to £77.76 each month, or £933 in a year, on what they pay for their childcare.

The amounts that employees can salary sacrifice, depending on their tax rate, are set out below:

(Note the tax bands are different in Scotland see https://www.gov.uk/scottish-income-tax for further information).

In most cases, employees manage their Childcare Vouchers through an online account, which they use to pay their childcare provider electronically. The portion of their salary which they have ‘sacrificed’ is automatically paid into the account, by their employer, usually through a Childcare Voucher company, such as Employers For Childcare.

How do employers save money?

Employers also save money by providing Childcare Vouchers to their employees as they do not pay the 13.8% employer’s National Insurance Contributions on the salary their employees have paid into their Childcare Voucher accounts.

From this saving, most employers pay a Childcare Voucher company, like Employers For Childcare, a small fee to administer the Childcare Voucher scheme on their behalf.

How much parents and employers saved by using Employers For Childcare’s Childcare Vouchers in 2020/2021

What is the impact of the changes to National Insurance from April 2022?

In September 2021 Prime Minister Boris Johnson announced a 1.25% increase in National Insurance Contributions from April 2022. This is the first step towards a new health and social care tax to fund reforms to the care sector and NHS funding in England. The increase will be paid by employees, the self-employed and by employers.

As a result of this increase to National Insurance Contributions, parents who are currently in receipt of Childcare Vouchers will make an additional saving towards their registered childcare costs from 2022.

At present, a basic rate taxpayer who salary sacrifices £243 each month makes an annual saving of £933. From April 2022, this will increase to £970 per year.

Employers will also make a greater saving on Employers’ NICs when the increase comes into effect.

But aren’t Childcare Vouchers closed to new entrants?

The Government closed the Childcare Voucher scheme to new entrants only in October 2018. Parents who were already using the scheme can continue to do so as long as they remain eligible. This means they must:

• Stay with the same employer
• Make at least one payment into their account every 52 weeks
• Not leave the Childcare Voucher scheme to join Tax-Free Childcare
• Have a child under the age of 16 (17 if the child has a disability).

Employers can continue to provide the scheme to their employees but cannot accept any new employees to ‘join’ their scheme.

Employers have the option of ‘switching’ provider by moving their Childcare Voucher scheme to a new provider if they choose to do so. This switch of provider has no effect on their employees’ eligibility to remain in the scheme. To find out more about switching your Childcare Voucher scheme to Employers For Childcare, click here.

What if I am not eligible for Childcare Vouchers?

The good news is, most working parents are entitled to financial support with their childcare costs, provided they are using registered childcare. If you are not eligible for Childcare Vouchers, perhaps because you have changed jobs, are self-employed, or are having your first baby, then you could benefit from either:

• Tax-Free Childcare or
• Universal Credit.

Depending on your circumstances, you could save from 20% up to 85% of your registered childcare costs. Unfortunately, many parents miss out because they don’t realise they are eligible. Our Family Benefits Advice Service at Employers For Childcare can tell you what support you are entitled to with your registered childcare costs. Freephone 0800 028 3008 to speak to an advisor.

Why should employers choose Employers For Childcare to administer their Childcare Vouchers?

Employers For Childcare is one of a number of Childcare Voucher companies operating in the UK, but is the only Social Enterprise which provides this service. This means 100% of the profits that we make from administering Childcare Vouchers on behalf of employers is invested in the work of our charity, which supports parents across the UK to get into and stay in work by identifying the financial support they are entitled to towards their childcare costs. By choosing to ‘buy social’ and switch their Childcare Voucher scheme to Employers For Childcare, organisations are using their purchasing power to help us create social value.

Last year, our charity identified £3.5 million in financial support for parents, having directly helped over 13,400 people and engaging with almost 150,000.

As well as ‘buying social’, organisations who choose to move their Childcare Voucher scheme to Employers For Childcare benefit from our exceptional customer service and can also save money through our competitive administration rates. You can read more on our latest Customer Satisfaction Survey here.

The process of switching is easy, it usually can be done in a matter of days and our dedicated team is on hand to support employers who choose to make the switch. One employer who switched recently told us: “The switching process was very easy and straight forward and as well as knowing we are creating social value by working with a Social Enterprise, we also saved money through switching. A real win-win!”

Find out more

If you are an employer who is interested in switching your Childcare Voucher provider to Employers For Childcare we would be delighted to offer a competitive quotation, tailored to your business. Get in touch by emailing hello@employersforchildcare.org or call us on 028 9267 8200.

If you are a working parent who would like to find out more about what help you are entitled to with your registered childcare costs simply call our advice helpline on 028 9267 8200 or email hello@employersforchildcare.org