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A little known and little used childcare voucher scheme could be one of the most popular tax breaks for families by the end of the decade, following the announcement by Chancellor Gordon Brown this week that savings of up £20.50 a week on childcare costs will be available from April 2005.
The Chancellor also announced increases in tax credits for low-income families and an up-rating in child benefit that amounted to a "Budget for children" according to anti poverty campaigners and children's charities.
Mr Brown, who admitted he had a vested interest in promoting childcare since the birth of his son John, said the cost of his package will be £1bn, and would allow him to meet his targets for halving child poverty by the end of the decade.
Childcare voucher schemes have been around for some time. They have the benefit of being exempt from national insurance, both for the employee and employers. A range of specialist firms offer to run schemes for employers, typically charging two thirds of the 11% national insurance saving made by the employer.
Take-up has remained low, however, as the benefits are deemed to be slim for both sides. At present, only one in 10 employers helps working mothers with childcare, either through workplace creches or through childcare vouchers.
From April 2005 the government says it expects 100,000 families to gain from the scheme when it includes exemption for tax as well as national insurance.
Mr Brown hopes employers will offer to boost the salaries of parents with a £50 voucher, knowing it will bring a large saving on tax and NI to its staff.
Experts predict employers are more likely to offer childcare vouchers as part of salary-sacrifice package. Staff will approach their employer to start a scheme and agree to forgo £50 a week of their salary.
The scheme means that working mothers on the 40% rate of tax will receive the equivalent of an extra £20.50 a week, or £88.80 a month, in their pay cheques; while basic tax payers will gain tax relief worth £16.50 a week or £71.50 a month.
Employers will be able to offer places at local nurseries to their staff free from the current restrictions if they prefer. At the moment the only tax exempt childcare is a workplace nursery run directly by the employer, which few are prepared to fund. However, it doesn't need to be a nursery. It could be any "formal registered childcare or approved home-childcare contracted by the employer", Mr Brown said.
Employers will not be obliged to set up voucher or nursery schemes, but are expected to come under intense pressure once the generous tax breaks are in place.
The Confederation of British Industry, which represents big employers, agreed with the Federation of Small Businesses that offering staff incentives to stay at work with childcare subsidies was something all responsible employers would support.
Who gets what after all the sums have been done
Any attempt to calculate who are the winners and losers from Gordon Brown's benefits giveaway this week is almost certain to fail. The interaction of the working tax credit, child tax credit, the child element of the child tax credit, the childcare element of the working tax credit and an employee's earnings is a complex equation beyond most welfare rights advisers - let alone the general public.
We asked accountants PricewaterhouseCoopers to have an initial stab at working out who are the biggest winners.
From the firm's figures everybody gains. A single parent earning £10,000 who has two children under 16, works less than 30 hours a week and has £100 of eligible childcare costs per week will gain from the rise in tax credits in April. Their income will already be benefiting from top ups worth £8,272, and by April that will have risen £450 to £8,722. A significant gain. But when the chancellor allows in April 2005 £50 of childcare costs a week to be paid out of gross income, and therefore be free of tax and national insurance, it is less clear if they will gain.
Under the childcare element of the working tax credit they are already having most of their childcare paid by the working tax credit and the tax gain from the new initiative looks like it will simply be traded off £1 for £1 against the tax credit benefits.
A couple with a joint income of £25,000 who have two children and currently claim £3,342 of tax credits will get an uplift in April of £470. When the £50 a week of childcare becomes tax free their benefits package rises to £4,670, which is a gain over two years of £1,328, assuming they also have more than £50 of childcare costs.
A couple earning £50,000 with two children and £100 of childcare costs a week misses out on all but the family element of the child tax credit. This has been frozen next year which means 2004 will bring a £545 tax credit payment just as it did in 2003. But in April 2005 they will hit the jackpot. Any tax breaks are worth more to them because they are higher rate taxpayers. Suddenly they will be £1,611 better off, a gain of £1,066.
Everyone with children will also see a small jump in their child benefit, which is paid, tax free, to families with children regardless of income. Each currently gets £26.80 a week. Next April it goes up to £27.55 - an increase of 75p a week. However, the single parent may be on child benefit of £28.30 a week, going up to £28.60 - an increase of 30p a week.
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