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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."