12 April 2018

This article was featured in the May 2018 issue of the magazine.

Jill Smith MCIPPdip, CIPP policy manager, provides (almost) an ABC of the changes affecting childcare provision 

Tax-free childcare (TFC) has now been rolled out to all eligible parents and though there are no ‘regulatory’ obligations for the employer there are still processes that need to be completed. To assist employees, employers could also consider forms of non-regulatory assistance that could be provided. 

For those employers still offering employer-supported childcare (ESC), there are also still requirements for payroll to factor in.


ESC delay

Ministers have delayed scrapping ESC vouchers by six months after an intervention by the Democratic Unionist Party. The childcare voucher scheme was due to be closed to new entrants from April 2018 but the new TFC system introduced by the government has suffered a succession of problems, so the period will be used to address the issues. 

The Income Tax (Limited Exemptions for Qualifying Childcare Vouchers and other Childcare) (Relevant Day) Regulations 2018 (SI 462 2018) sets 4 October 2018 as the cut-off date for new entrants.


...TFC system introduced by the government has suffered a succession of problems...



From April 2017, the government introduced TFC, which is a new method of providing parents with ‘tax relief’ on childcare costs. The relief is given as a 20% top-up to savings in an online account that qualifying parents can set up for each eligible child. Parents can open an online account and use it to pay into it to cover the cost of childcare with a registered provider. The maximum top-up is £2,000 on funds of £10,000 for each account in each tax year (double these amounts for a disabled child). 

The total amount in the account can exceed £10,000 to enable parents to manage all the childcare costs in one place. Only one account per child is allowed, although HM Revenue & Customs (HMRC) has indicated that other family members or employers can also pay into the accounts.

This new scheme is available to working families where each partner earns less than £100,000 a year and is not in receipt of tax credits or universal credits. Each partner must also earn more than the equivalent of sixteen hours a week at the current national living wage. There are four key criteria that will determine whether a child is eligible for TFC:

  •  children must be under the age of twelve (or under seventeen if the child has a disability) 

  •  both or lone parents must be in paid work

  •  both or lone parents must not be in receipt of any support through tax credits, universal credit or ESC

  •  parents must not be additional rate taxpayers.

The registration process checks the individual’s eligibility for the scheme and at regular reconfirmation points parents will be asked whether they expect to earn an amount equal to, or above, the minimum income level for the forthcoming quarterly entitlement period. They do not have to report precise earnings as HMRC assesses earnings accurately by using information from the pay as you earn (PAYE) system.


Employer assistance?

There is no specific role for employers in this scheme although some may assist employees by providing information about the scheme (see Employers could also arrange to make payments into employees’ childcare accounts from net pay or as additional payments. Deductions from payslips would be after tax instead of salary sacrifice and, unlike ESC, for employers there would be no National Insurance contributions (NICs) relief. Employers could also choose to contribute towards childcare costs, though this may be considered a benefit in kind.

As we know, TFC will eventually replace directly contracted childcare and childcare vouchers. Workplace nurseries are not affected. Until October 2018, employees can continue to claim childcare vouchers or use directly contracted childcare provided by their employer. After October 2018, employees will no longer be able to make new claims for childcare vouchers or benefit from tax and NICs savings through directly contracted childcare. of these exceptions is  for childcare vouchers ...



Employees receiving directly contracted childcare or childcare vouchers can continue to use them after October 2018 if their employer continues to offer them or they can choose to move to the TFC scheme. They would need to consider carefully which scheme they would be better off in and this will depend on factors such as:

  •  whether one or both parents is in an ESC scheme

  •  the rate of tax paid

  • how many children they have.

For example: a lone parent with one child receiving the maximum support through an ESC scheme for a basic rate tax payer will be saving a maximum of £933 per year. If they were to join the TFC scheme, they would be saving a maximum of £2,000 per year.

It is important for employees to be aware that the TFC scheme offers savings per child per year, whereas the ESC scheme offers savings per parent per year. GOV.UK has a calculator ( that can help employees decide between the schemes.



Employees who are in an ESC arrangement and who decide to swap to the TFC scheme must provide their employers with a childcare account notice (CAN), which triggers their withdrawal from ESC. On receipt of a CAN, the employer must end the employee’s access to the ESC arrangement.

The CAN is a written notice, such as a letter or email, that employees must give to their employer within ninety days of opening a TFC account to confirm that they wish to exit ESC. This window allows time for employees to be satisfied with the TFC arrangements because they will not be allowed to swap back to the ESC after giving notice to leave it.

As we know, the date has been extended to 4 October 2018 when the ESC scheme will be closed to new entrants. Parents who are already receiving support through these schemes will be able to continue receiving support (in the same way) for as long as they continue to work for their current employer, and the employer continues to offer the scheme. 



Since April 2011, all new scheme members are to have their earnings estimated when they join an ESC scheme. Their eligible childcare voucher allowance is recalculated at the start of each tax year. If their earnings change during the tax year, their childcare vouchers will only be affected from the start of the next tax year. So, employers need to establish a process for checking their employee’s earnings when they join the scheme and at the start of each tax year. 

HMRC requires employers to conduct a basic earnings assessment (BEA) which consists of calculating the employee’s ‘relevant earnings’ and then comparing the result to the tax band thresholds. This determines whether the employee should be treated as a basic, higher or additional rate taxpayer for their childcare vouchers. 

The assessment of relevant earnings should include: basic contractual pay, commission, contractual or guaranteed bonuses (including loyalty bonuses), London weighting or other regional allowances, taxable benefits, shift allowances, skills allowances and market rate supplements and guaranteed overtime. There is no need to include: performance-related or discretionary bonuses, non-guaranteed overtime payments, tax-exempt benefits such as pension contributions and payroll giving, expense allowances which are exempt from PAYE.

Where childcare vouchers are provided by salary sacrifice, the earnings assessment should be based on post-sacrifice earnings. Similarly, the assessment should allow for other salary sacrifice arrangements such as pension schemes or company cars.

Once the employee’s relevant earnings have been calculated, they need to be compared to the rest of the UK (rUK) tax band thresholds. Employers must ensure that the earnings of Scottish taxpayers are assessed against the rUK higher rate threshold and not against the Scottish threshold.

The tax band thresholds are calculated by adding the personal allowance to the income tax band. Where an employee’s relevant earnings are less than £150,000, the appropriate personal allowance is £11,850. For employees with higher earnings, the personal allowance is zero. 

If an employee joins the scheme partway through the year, then their earnings assessment should be based on their expected earnings for the current tax year as well as considering any relevant pay that they have already received in this tax year. A good example is where an employee has changed hours from part-time to full-time; here, their earnings assessment should include both their past part-time earnings and their expected full-time earnings. 

If an employee has just joined your company then you would ignore any income from their previous employment and base the earnings assessment on the pay which you would expect them to earn in the current tax year, pro-rated to an annual figure. 

HMRC requires employers to keep a record of all their earnings assessments. There is no defined format for this, but it must contain sufficient information to show how the assessment was performed in the event of a HMRC compliance audit.



Concerned about the cost to tax and NICs revenues of salary sacrifice arrangements the government acted with effect from April 2017 to restrict the range of benefits in certain circumstances. New rules were brought in and the term ‘operational remuneration arrangements’ (OpRA) introduced. The new OpRA provisions make no changes to the underlying salary sacrifice principle, but do change how the benefit is taxed.

Where a salary sacrifice is entered into or modified after 5 April 2017 all benefits provided under that agreement will be taxed at the higher of the standard benefit in kind valuation or the salary sacrificed. Thankfully there are a few exceptions and you will be pleased to know that one of these exceptions is for childcare vouchers meaning that the OpRA rules do not affect employees, so they can still sacrifice part of their salary which will be exempt from tax and NICs.