Employers
In April 2005 the Government introduced Tax Free Childcare Vouchers, encouraging more employers to help their employees with their childcare responsibilities.
There are few other tax incentives currently available where both the employer and employee gain financially. Supplying Daisies Vouchers to your employees is a Win:Win scheme:
• Demonstrates commitment to all staff
• Improves staff motivation and morale
• Seen as a ‘fair’ scheme – helps parents but does not penalise or alienate non-parents
• Assists in recruitment and in particular staff retention for returning mothers
• May help reduce absenteeism (if affordable, organised childcare is available)
The compliance and administration is straightforward, and Daisies Vouchers’ support and marketing package ensures that the scheme is not an administrative burden to the company.
The Scheme - Salary Sacrifice
This type of scheme is established under recent Government Salary Sacrifice legislation.
Salary Sacrifice means that employer and employee agree to a reduction in taxable salary, and the employee receives an equivalent figure in the form of childcare vouchers. The value of childcare vouchers is exempt from Income Tax for the employee and NICs for both employer and employee. This means NIC savings of up to 12.8% for employers and up to 11% for employees, plus the tax savings for the employee, on the value of the vouchers.
The agreement between employer and employee is a formal one. This means that the employee must sign an amendment to their existing employment contract, incorporating an agreement to the salary sacrifice (this is provided by Daisies Vouchers – please Section 3 below).
More information is available online from HMRC at http://www.hmrc.gov.uk/specialist/salary_sacrifice.pdf [Opens a PDF in new window]
Details of the Scheme
1. Compliance and Record keeping
The employer is at all times required to make the correct tax and NIC deductions for employees. An employer will need to demonstrate that it meets the criteria for salary sacrifice scheme. In brief, this means:
- *Contract of employment is amended and has taken effect:
(NB: This is the key documentation required by HMRC)- Amendment to employment contract must be kept with original contract
- Payslips must reflect amended salary
- **Employers must ensure the childcare is eligible:
- Record kept of childcare provider’s registration or approval number
- Employee agrees to advise employer of any changes in circumstances in relation to the child and childcare
- Records kept of any expiry dates for childcare providers
- **Employers must ensure the child is eligible:
- Employee must declare they have responsibility for the child in question
- Record must be kept of child’s date of birth to ensure child is eligible
- *Scheme must be open to all employees:
- The scheme must be publicised to all employees
- The scheme must be publicised to all employees
- A benefit has been provided:
- Records must be kept of the scheme rules
*Daisies Vouchers will provide the necessary forms, scheme rules and marketing support material to ensure that compliant documentation of the scheme is in place.
**Daisies Vouchers will obtain and store this information, which can then be provided to the Employer on request by the Inland Revenue.
2. Responsibilities
Before staff enter the Daisies Vouchers scheme and commit to a salary sacrifice, it is important that they are aware of all the features of salary sacrifice and how it might affect their overall financial position. For a minority of people, the benefits of accepting Daisies Vouchers will be outweighed by reductions in certain benefits. It is important that each individual case is assessed on its merits.
Most of the information required can be found it the Employee Information pack supplied to employees before joining the scheme.
3. Salary Sacrifice Agreement
As above, an amendment to the employee’s existing contract of employment will need to be signed when an employee agrees to sacrifice part of their salary for childcare vouchers. This amendment is incorporated into the Daisies Vouchers Employee Registration Form, which once completed and signed by the employee should be kept with the employee’s existing contract of employment.
This agreement will normally be for a set period of time (usually one year), after which the agreement can be reviewed. The employee does not have an automatic right to revert back to their original salary within the contractual period, however responsible employers should consider an early review in the event of a lifestyle change, E.g. birth, death, change of personal circumstances. Employers should be clear of what circumstances they might consider accepting.
4. Effects of Salary Sacrifice on contribution & earnings-related benefits
Earnings Related Benefits
It is good practice to maintain the link with the full, notional salary value for each employee, as this may affect other employer-provided benefits if these are calculated on basic salary. (E.g. overtime, sick pay, on-call time, shift- allowances and employers maternity pay). This should be agreed prior to commencing a scheme.
Voucher Limit
Subject to your agreement, employees can take any amount of their salary in vouchers – however only the first £55 per week qualifies for NICs exemptions for employers and employees, and Income Tax for employees. Please also note that any vouchers over the exempt amount must be registered on the employee’s P11D.
Minimum Wage Requirement
There is a legal consideration that when accepting a salary sacrifice, the employee’s cash pay must not fall below the national minimum wage (NMW), currently set at £5.05 per hour. An employee can however save up childcare vouchers and use them at times of the year when they have more need for childcare (e.g. school holidays).
State Benefits
Under salary sacrifice schemes, the amount employees receive in childcare vouchers will not count as part of work related payments such as Statutory Maternity Pay (SMP) and Statutory Sick Pay (SSP). These benefits are based on average earnings over a fixed period.
As above, best practice for employers is to maintain the link with the full or notional salary for SMP and SSP – though for both benefits employers are only able to claim back the statutory amount. As pregnancy is a lifestyle change, employees should be given the right to review contractual arrangements in order that SMP will not be affected, if this is relevant.
An individual’s eligibility for other contribution-based benefits may be affected if they participate in a childcare voucher salary sacrifice scheme, as their NIC’s will decrease. Examples of some benefits that may be affected are the Jobseekers Allowance and the State Pension. Contribution based benefits are calculated according to the level of National Insurance Contributions (NIC) paid by an individual.
5. Effects of Salary Sacrifice on Child Tax Credit and Working Tax Credit
The Child Tax Credit (CTC) offers financial support with general family costs. Working Tax Credit (WTC) supports individuals on lower incomes, where working parents may be eligible for additional help towards (registered) childcare costs.
The amount of credit parents receive depends on a number of factors including income, size of family and amount paid in childcare. The receipt of childcare vouchers through a salary sacrifice scheme can affect parents’ entitlements to these tax credits as follows:
Where average earnings have effectively been reduced, employees could receive a higher payment through the WTC. However, the value received in childcare vouchers from an employer cannot be considered as childcare costs when calculations are made for their entitlement to the childcare element of WTC (this would be claiming twice for the same benefit). The childcare element of WTC may therefore be reduced. It is advisable for parents to find out what level of support they could be entitled to through the CTC and WTC before they sign up to a Daisies Vouchers scheme. In some instances parents may be financially better off opting to receive help through the WTC rather than through their employers childcare voucher scheme.
Each individual should check out their own situation carefully before deciding which benefit is better.
The following points provide an outline guide as to whether someone would get more help from Tax Credits, or from childcare vouchers, but individual advice must be sought:
- Employees will always benefit from a tax and NICs free childcare voucher scheme if it is offered on top of their existing salary.
An employee will generally be better off accepting childcare vouchers in return for a salary sacrifice if they can answer “yes” to one or more of the following:
- Their eligible childcare costs are more than £175 per week if they have one child or £300 per week if they have two or more children. In this case they will always be better off accepting childcare vouchers to cover their childcare costs above these limits.
- They are receiving tax credits at the family element (£545 per year, or £1090 per year if they have a baby aged under one) or less and they are claiming for their childcare costs.
- They pay tax on their earnings at the higher rate of 40%.
An employee will generally be worse off or, at best, no better off accepting childcare vouchers in return for a salary sacrifice if they can answer “yes” to all of the following:
- They are receiving tax credits of more than £545 per year (or £1090 per year if you have a baby aged under one) and they are claiming for their childcare costs.
- They do not pay tax on their earnings at the higher rate of 40%.
- Their eligible childcare costs are no more than £175 per week if they have one child or £300 per week if they have two or more children.
For more information on Child Tax Credit and Working Tax Credit contact the Tax Credit Helpline on 0845 300 3900 or go to www.hmrc.gov.uk/childcare/taxcredits-guidance.htm.
6. Cost of running a scheme
There is no cost to the employee or employer to set up a Daisies Voucher Scheme. We administrate the Scheme and are paid by means of a service charge of 5-7.5% of the voucher amount, which you can deduct from the Employers 12.8% NIC savings. This means that in overall terms, the employee benefits from tax savings, the Company saves on their NIC bill, and does not have to allocate a great deal of resource to run the Scheme.
7. How the scheme works
For more details of how the scheme is set up and the ongoing running of the scheme, please refer to our ‘Step By Step Employer’s Guide’, or contact Daisies Vouchers on 0207 291 9503 or info@daisiesvouchers.com.