Background and Summary
3.The Childcare Payments Act 2014 introduces a new scheme which provides financial support to help working families with the cost of childcare and help those with responsibility for children to take up paid work, or to work for longer, where they may be deterred from doing so because of the need to meet childcare costs.
4.Once the scheme is implemented, the Government will make a top-up payment of £2 for every £8 which a person pays towards childcare. Government support will be capped at a maximum of £2,000 per child each year, although there will be no restriction on the number of children for whom support is available. The scheme will be managed by HMRC and the Government intends to introduce it from autumn 2015.
5.The introduction of the scheme was announced by the Chancellor of the Exchequer at Budget 2013 when it was described as ‘tax-free childcare’. The use of that term reflected the fact that the 20% Government top-up payments in effect represent the basic rate tax element which would apply to the income used by the individual to fund their childcare costs. It was also intended to make clear that the receipt of financial benefits under the scheme will not give rise to any liability to income tax or National Insurance Contributions (NICs) on the part of the recipient.
6.The scheme will replace some existing tax and NICs reliefs which are provided for childcare. These are known as Employer-Supported Childcare or ESC, and include childcare vouchers, childcare which the employer provides by an agreement with a childcare provider (known as directly-contracted childcare) and workplace nurseries. Workplace nurseries will not be affected by the Act and will continue to receive unlimited tax and NICs relief. Subsequent references to Employer-Supported Childcare in these Explanatory Notes only refer to childcare vouchers and directly-contracted childcare.
7.Under the childcare voucher model of Employer-Supported Childcare, an employer typically withholds part of an employee’s salary which they pay into a childcare voucher account operated by an independent voucher provider. The money held within that account can then be spent on childcare. There is a financial incentive for the employer to offer their employees an Employer-Supported Childcare scheme in that the amounts withheld from salary and paid into the accounts are exempt from income tax and both employees’ and employers’ NICs.
8.Tax and NICs reliefs will be withdrawn from employees and employers where the employee enters a childcare voucher or directly-contracted childcare scheme after the new scheme has come into force. However, those employees who are in such a scheme at that date can continue to receive the reliefs for as long as they remain eligible, provided that their employer continues to operate it.
9.The Government published a formal consultation document on the design and operation of the new scheme on 5 August 2013 and consultation ended on 14 October 2013. The response to the consultation was published on 18 March 2014. A further consultation was published on 23 May 2014 and ran until 27 June 2014, on how childcare accounts will be provided under the new scheme. The response to that consultation was published on 29 July 2014.
10.The Act confers a number of powers to make regulations and these notes explain how these powers are intended to be used. Draft regulations were published by HMRC for consultation from 14 July to 3 October 2014. The Government intends to make the main regulations by the end of March 2015.