Childcare costs - fears grow on the future of childcare vouchers

Katy Morton
Friday, January 25, 2013

Childcare voucher companies are urging the Government not to abandon but extend the current scheme, amid speculation that childcare tax breaks may be brought in to replace vouchers.

A plan to enable working parents to claim up to £2,000 a year in tax breaks to help pay for childcare is thought to be one proposal being considered by the Prime Minister and Deputy Prime Minister (News, 7 January 2013).

However, there is speculation that the Government plans to axe childcare vouchers and replace them with other tax breaks.

John Woodward, chief executive of Busy Bees Benefits, has questioned why the Government is suggesting spending money on introducing a new system when he says the childcare voucher scheme is free for the Government to administer, and is successful in getting parents back to work.

A survey by Busy Bees Benefits found that the provision of childcare vouchers influenced the decision of one in three parents to return to work or remain with their current employer.

Mr Woodward said, 'How will this new system work and how will the Government monitor where and how parents are spending the money? It is believed that £265 million of the £1,606 million working tax credit system was estimated to have been claimed erroneously in 2010/11. How will the Government ensure this does not happen with a new system?' (These are HMRC figures.)

'Childcare vouchers also ensure that parents use only registered providers. Will the new system have a regulation process to ensure that parents use their allowances to pay for registered childcare providers?'

His concerns were echoed by the Childcare Voucher Providers Association (CVPA), whose members include Busy Bees Benefits, Allsave, Edenred, Employers for Childcare Vouchers, Computershare and Sodexo Motivation Solutions.

Julian Foster, (right), founding member of the CVPA, said, 'Until the Government announces what the new scheme is, there is only speculation. But, if tax exemptions on vouchers were removed it would be a massive issue for over a quarter of a million parents who indicated in our survey (see box) that, without them, they or their partner would have to give up work or reduce their hours.'

Busy Bees Benefits and the CVPA are now urging the Government to build on the existing childcare voucher scheme and extend it to include self-employed parents and those on the national minimum wage.

Currently, childcare vouchers are only available through an employer to employees paid via PAYE. Parents whose employer offers childcare vouchers but earn the national minimum wage, or just above, are not currently eligible for vouchers as the salary sacrifice scheme would see their earnings drop to below the NMW.

To enable these parents to use vouchers, the association is calling for a change to the system so that those on the NMW can use vouchers, in the same way that employees whose union memberships and pension contributions take their salary below the NMW are allowed to.

Busy Bees Benefits has also been campaigning to raise the cap on childcare vouchers, from the weekly allowance for working parents of £55 to £75, as it has not risen since 2006.

Mr Foster said, 'Solving childcare affordability doesn't have to mean reinventing the wheel. With a few simple changes to the childcare voucher scheme, government could give working parents the support they need.

'In order to increase access to the scheme, the system could be strengthened by introducing a "right to request" for employees. The introduction of such a right to request could mirror the provisions previously put in place around flexible working and would reinforce the support working parents receive for their childcare costs.'


Who benefits most from childcare vouchers and tax breaks is at the centre of the dispute between the Conservatives and the Liberal Democrats about the best way to support parents with childcare costs. This failure to agree on a way forward has delayed the Childcare Commission report.

There has been speculation that tax breaks for all working parents could replace childcare vouchers, but now it appears that more targeted support could emerge to replace the voucher system.

The announcement was put back earlier this month following a meeting of the quad of senior ministers - David Cameron, Nick Clegg, Chancellor George Osborne and Chief Secretary to the Treasury Danny Alexander - which failed to agree on the details of the scheme.

Mr Clegg has said the aim is 'first to identify those families that will in future be on Universal Credit, but will not get enough from Universal Credit to cover their childcare costs and provide an incentive for them to work.' The second aim, he said, was to help those families who do not receive Universal Credit, but 'don't feel rich at all and feel crucified by high childcare costs'.

But who uses childcare vouchers, which are not a universal entitlement in their current form?

The CVPA quotes a report by the Social Market Foundation, based on the Family Resources survey, which shows that 83 per cent of childcare voucher users are basic rate tax payers, with the largest take-up among manual and unskilled workers. They say that 400,000 basic rate tax payers and 100,000 higher-rate taxpayers use childcare vouchers.

Meanwhile, the Resolution Foundation in its recent report, 'The costs of childcare after housing costs', stressed that vouchers tend to favour better-off households.

As Vidhya Alakeson, deputy chief executive of the Resolution Foundation, explains, 'The difference between our analysis and the SMF analysis is about individuals and households. A lot of basic rate tax payers are in higher income households, so if you look at households, you get a very different picture than looking at individuals.

'There are also differences in the data. The SMF sample is based on 153 people in the 2007-8 data. Ours is based on 284 individuals in the 2010-11 data. This is the only data that exists but the sample size is small in both cases, although DWP feels that this question is reliable and so we are confident in our analysis.'

However, an industry survey carried out by CVPA in Nov/Dec 2012, which received responses from 48,000 voucher uses, found that 17 per cent of parents would be forced to leave work and 38 per cent reduce their working hours should tax exemptions on vouchers be removed.

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