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."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
PROMOTED VIDEO
Sport
Fans hold up a scarf at West Ham vs Liverpool
footballAfter Arsenal's clear victory, focus turns to West Ham vs Liverpool
New Articles
i100... she's just started school
News
news
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Sport
football
New Articles
i100... despite rising prices
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 BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam