In his speech to the Labour Party Conference, Gordon Brown recently announced plans to phase out tax and national insurance exemptions for childcare vouchers.
Currently, employers can provide employees with up to £55 per week in childcare vouchers. These can be substituted for salary and no tax or national insurance is charged on the vouchers at all. The employee saves tax and national insurance and the employer saves employers’ national insurance.
Under the new plans, from April 2011 employees who join a childcare voucher scheme will not be entitled to the tax and national insurance exemptions currently available. Employees who have already joined a childcare voucher scheme by April 2011 will continue to benefit until April 2015.
Due to public outcry, including a petition signed by over 81,000 people defending childcare vouchers, it is now rumoured that Gordon Brown is going to backtrack his plans and keep the childcare voucher system in place.
The final plans are to be announced in the pre budget report on 9 December 2009.
It is crucial to remember that families with children do have an alternative available to the childcare vouchers system. It is possible to claim for assistance to help pay childcare costs through the Child Tax Credits and Working Tax Credits system.
By making an application to claim tax credits, parents can claim up to 80% of childcare costs of up to £175 per week where they have one child in childcare or up to £300 per week where they have two or more children in childcare. We are often therefore asked the question whether employees are better off taking childcare vouchers or by claiming tax credits to help towards the costs. This does depend on individual circumstances, such as the weekly cost of the childcare and the number of children you have. However it is generally better for families who do not pay tax at the higher 40% rate of tax, to claim tax credits rather than as a salary sacrifice and taking vouchers. Every case needs to be considered separately and Dodd & Co can advise you of the best option for you.
If the proposal to scrap the vouchers goes ahead, it will generally be higher rate taxpayers that are more adversely affected by the change although they are also likely to be due some tax credits assistance depending on their income and circumstances.
If you need any help or would like to discuss your own circumstances Dodd & Co will be happy to help. Please call 01228 530913 or 01768 864466.
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