Childcare vouchers – What they are and how to use them

If you are new to having a child you may not know why would you want to ask your employer for childcare vouchers.

Definition.

Childcare vouchers are a specific amount of money (up to £243 per salary at the moment) that every parent (mother, father or both separately) may ask to be deducted from their gross salary (before taxes are paid) to use to pay their kid’s childcare provider (child-minders, nurseries, school breakfast and afternoon clubs, leisure centers holiday clubs).

Benefits.

1. You don’t pay taxes on the amount that you pay your childcare provider through vouchers. To make it simpler to understand, please follow the below example.

Your gross monthly salary is £1000. Your net income is £800 (I applied a 20% off for taxes as a round figure). You currently pay £200 for your child nursery out of your own pocket. So you are left with £600 to spend for everything else. When you apply for £200 childcare vouchers, your monthly gross salary becomes £800 (1000-200 deducted beforehand). Your net income changes to £640. However now you don’t have to pay your childcare provider with your cash as you are paying them with your £200 voucher. As you can see you have an extra £40 available to spend on everything else. These are the taxes you didn’t pay on the amount you spent on childcare through your monthly voucher.

2. You can ask to stop pretty much anytime (as far as I know). Beware though that the current government is planning to completely change the existing voucher system with a new one which I have not studied in depth yet (sorry 🙂 ). All I can say is that, if you are in the current system you can stay on, but if you leave the scheme once the law is changed (autumn 2015) you will not be able to re-enter the old system, only the new one will be available to you and this could be less beneficial than the previous one, depending on your situation.

3. Usually it is quite easy to set up, both for your employer and your childcare provider, at no extra cost, if they are not in such a scheme already.

4. If you were on the vouchers scheme before going on maternity leave and you are entitled only to the statutory maternity pay, your employer is responsible to pay the vouchers on your behalf as you have no salary to sacrifice anymore whilst you are not working. This is very important to know, as most employers do not tell you this, therefore if you don’t find out yourself you end up losing on it. The only thing I am not sure is if you can apply for childcare vouchers before you have children yourself. If not, this information is only interesting for a second (third, forth and so on) delivery. Again, let me make a practical example.

Let’s assume you are only entitled to statutory maternity pay. This means that your employer will not pay any extra salary on top of what the government will pay whilst you are on maternity leave (your allowance comes from the taxes you paid so far). Currently then the minimum pay you can get on maternity is £138.18 per week (after the initial 6 weeks at 90%). This amount cannot be sacrificed in any way by law.

If for instance you were giving up £200 from your salary before going on leave to receive childcare vouchers for the same value, you are still entitled to get those same vouchers but you have no salary to sacrifice. Hence your employer, who would have not paid anything on top of the £138.18 per week, is obliged to pay the difference to create your voucher every month. This way it may feel to you as if you were paid roughly £46 extra per week (£200 per month multiplied per 12 months in the year and divided per 52 weeks). You can use the vouchers you are still receiving in different ways, such as to pay nursery for your older child if you have a small gap (1 to 3 years) between the 2 kids as it may feel really hard work to have them both at home despite you are off; or you can accumulate this sum to pay childcare when you will return to work as full time nursery can be much more expensive than the maximum voucher you can get a month (£243 as mentioned before)

Downsides.

1. Once you sign up, your monthly incoming net salary will be lower than before as you are giving up an amount of money on your gross salary before taxes are calculated. This may give you the impression that you are earning less. In reality you would probably have to pay your child-minder, nursery or school anyway every month, so this way at least you don’t pay taxes on top of what you pay for childcare purposes, hence it is as if you were earning more (see benefit 1 as explained above).

2. You cannot revert the vouchers accumulated in your account back into cash if you realize you won’t have a chance to use them all. This is because childcare vouchers are a non-cashable benefit. So plan wisely how to use them all rather then keeping them on rolling when you don’t need it anymore. I don’t think you can pay another child’s expenses (such as a niece or a grandchild) with your own voucher but it’s worth checking…

3. If you receive childcare vouchers you cannot claim child tax credit at the same time. However in the last few years the Tories have put the maximum joint income so low (roughly £26K per year when I last checked in spring 2014) that I would doubt the most of you would be entitled to tax credit anyway. I personally used this alternative during my first maternity leave since at the time (2011) the maximum joint income must have been around £40K but I may remember an incorrect figure so give it the benefit of the doubt.

4. You can only pay registered childcare providers with those vouchers. This simply means you cannot pay unregistered people such as a daughter’s friends babysitting your child whilst you are at work, at a lower rate that an official provider.

I hope all my reflections were helpful for you to know a bit more on the topic and ultimately make a good financial decision based on your income and your budget 🙂

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s