Mystery of the childcare vouchers that no one wants

Working parents can save up to £1,195 a year with this tax-efficient 'salary sacrifice' scheme. So as nursery costs soar, why isn't it more popular? asks Chiara Cavaglieri

If you're a full-time working mum or dad, childcare is one of life's essentials. However, unlike other essentials such as petrol, food and, now, power, the recession does not herald falling costs when it comes to looking after children.

According to the Daycare Trust charity, a typical full-time nursery place for a child under two has increased in price by 5 per cent in the past year to a whopping £159, on average, per week. In some parts of the country, most notably London and other big cities, the costs of securing a spot in a day nursery or playgroup can be much higher. You can almost hear the strain on Middle Britain's finances.

All the same, many parents are ignoring potential savings of more than £1,000 a year, according to market research firm TNS Global. A little-known government-backed scheme offers working parents the chance to claim childcare vouchers, which are exempt from tax and national insurance contributions, in exchange for a reduction in salary. Despite the possibility of substantial savings through the tax relief, TNS Global found that only 2 per cent of working parents are taking advantage of the scheme.

Employers that sign up to the initiative take a non-taxable "salary sacrifice" from any members of staff who wish to join. Companies can either run the scheme themselves or use one of a large number voucher firms to manage it on their behalf. The employer or voucher company then replaces this money with the equivalent in childcare vouchers.

Childcare providers, including registered nurseries, childminders and au pairs, can redeem the vouchers either via the employer or the voucher firm.

Working parents can set the amount they require to cover childcare costs, up to a maximum of £243 per month. Voucher scheme provider Accor Services says this would save a higher-rate taxpayer as much as £1,195 a year and a basic-rate payer £904.

So why is the scheme proving so unpopular, particularly in light of the ever-rising tide of childcare costs? According to Busy Bees, one of the UK's largest voucher companies, many parents simply don't know enough about the scheme or are confused about how it works.

Simon Moore, managing director of Busy Bees Childcare Vouchers, says: "One of the main issues is that there is a substantial lack of awareness among families regarding the existence of the scheme. In addition, among those who do know about it, there is a common misconception that the vouchers can only be used for nursery-age children, when in fact they can be used for children up to the age of 16 and for a range of needs, including day nurseries, childminders, nannies, before- and after- school clubs, au pairs and holiday clubs."

Mr Moore adds that companies, too, need to be aware of the benefits the scheme can bring: "Awareness and take-up of the scheme by employers is key. It is financially beneficial to an employer as the vouchers do not attract national insurance or tax."

But where the initiative seems to fall down is with the very people who would benefit most. Lower earners, who pay basic-rate tax and claim working tax credits for childcare, could lose entitlement to tax credit. Parents can claim up to 80 per cent of childcare costs through working tax credits – but only on costs that they meet themselves. If an employer is paying childcare costs through the vouchers, then despite the salary sacrifice, parents will not be considered to have met the costs themselves and could have their benefit reduced.

Any entitlements to contributions-based or income-related benefits – such as maternity pay, pensions and even overtime pay – may be similarly affected. And parents earning near the national minimum wage may not be eligible for the scheme at all if, as a result of the salary sacrifice, they fall below the minimum wage.

Employers seem just as reluctant to take up the scheme. One of the biggest deterrents is that new legislation states that anyone on maternity leave must have any benefits continued in any additional leave up to the maximum of 52 weeks. Therefore, parents signed up to the childcare voucher scheme must continue to receive the vouchers from their employer throughout those extra weeks. As salary sacrifice cannot take an individual's income below that of statutory maternity pay, employers will in effect have to pick up the tab.

"Businesses and employees have traditionally enjoyed having the option of using an uncomplicated, no- cost, child voucher scheme. By confusing the system, and introducing potential costs for employers that provide it, the Government risks undermining any incentive to take it up," says Abigail Morris, policy adviser for the British Chambers of Commerce.

On a practical level, vouchers can cause difficulties for childcare providers too. Any processing errors or delays in redeeming vouchers can lead to considerable problems for smaller nurseries and childminders. "Although we think the vouchers are great for helping parents, from our point of view the system can be a problem. It can take up to a month to redeem vouchers and, with many of our parents paying by this system, it can hinder cash flow," says Michelle Flahaut, supervisor at registered charity Canterbury Day Nursery. "In fact," she adds, "private companies which offer their own system tend to be much better as they pay us directly every pay-day by cheque."

Suggested Topics
News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
sportDidier Drogba returns to Chelsea on one-year deal
News
people
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
PROMOTED VIDEO
Sport
Louis van Gaal would have been impressed with Darren Fletcher’s performance against LA Galaxy during Manchester United’s 7-0 victory
football
Voices
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Sport
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
sport
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
Sport
Rhys Williams
commonwealth games
News
Isis fighters travel in a vehicle as they take part in a military parade along the streets of Syria's northern Raqqa province
i100
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Life and Style
fashionLatex dresses hit the catwalk to raise awareness for HIV and Aids
Travel
travel
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Risk Manager - Banking - London - £650

    £600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

    The benefits of being in Recruitment at SThree...

    £18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

    Test Analyst - UAT - Credit Risk

    £280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Day In a Page

    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform