With the spiralling cost of childcare, the decision whether to go back to work following maternity leave can be a finely balanced one. Many employers are keen to retain your skills and talent and so offering Childcare Vouchers makes a lot of sense. What’s more, opting for Childcare Vouchers could save you up to £933 per year on Income Tax and National Insurance Contributions.
Here’s how they work:-
Firstly, your employer needs to register for the Childcare Vouchers scheme. Most employers are keen to do so as this can save them money by reducing the amount of National Insurance contributions that they have to pay.
Next, you can opt to ‘sacrifice’ some of your salary and be paid in Childcare Vouchers instead. As Childcare Vouchers are taxed differently to normal pay (and in many cases are tax-free), opting for Childcare Vouchers can reduce the total amount of Income Tax you pay. Even better, Childcare Vouchers do not attract National Insurance contributions, meaning you can save even more. The actual amount you will save depends upon your circumstances, but it can be as high as £933 per year!
Finally, you will start receiving Childcare Vouchers, normally on your pay date, which can be used to pay for childcare at ‘registered’ or ‘approved’ childcare providers, such as childminders, pre-schools and certain after-school clubs.
Is there a catch?
There’s no catch, but there is a limit to how much of your pay can be ‘sacrificed’ in favour of Childcare Vouchers. For basic rate taxpayers, this limited is set to £55 per week, with lower limits for high rate or additional rate taxpayers. It is worth pointing out, however, that the limit is ‘per person’ so if Mum and Dad are both working, they could both potentially opt to receive some of their pay as Childcare Vouchers.
Are Childcare Vouchers right for everyone?
In some circumstances it could be best not to opt for Childcare Vouchers. An example is those who are receiving the childcare element of Working Tax Credit as this could be reduced (Hint: This handy calculator from HMRC should help with this decision: http://www.hmrc.gov.uk/calcs/ccin.htm). If you are thinking of applying for a mortgage, where you will need to demonstrate your income, ‘sacrificing’ some of your income for vouchers could work against you. It is therefore worth taking care to consider the impact before ‘sacrificing’ some of your pay for vouchers.
Childcare Vouchers can be a tax efficient way to pay for childcare with tangible benefits to both the employer and employee. Despite this, care should be taken to assess the impact on your wider finances. More information is available from HM Revenue & Customs http://www.hmrc.gov.uk/leaflets/ir115.pdf
By David Vaughan, Chartered Financial Planner at Plan Money. www.plan-money.co.uk