The Inland Revenue conceded last week that nearly one in three basic rate taxpayers currently claiming exemption on the national insurance of a chunk of their salary when they forgo it in return for childcare vouchers could be adversely affected. Employers will be hit, too, as they lose on the savings they have been making on their national insurance contributions (NICs).
Anne Ross, corporate business manager of Accor Services, the biggest childcare voucher company in Europe, said that under these salary-sacrifice schemes, some people covered all or nearly all of their childcare fees with vouchers and claimed exemption on the associated national insurance. Some parents were switching as much as 1,000 a month of salary into vouchers, although the average amount sacrificed by Accor's clients was 400 to 500.
The new scheme, which is set out in the Finance Bill now going through the House of Commons, caps both tax and national insurance exemptions at 50 a week.
Stewart Pickering, director of nursery chain Kids Unlimited, which runs a childcare voucher operation, said, 'The change discriminates against single parents. They would be limited to the 50 per week maximum, while couples would be able to claim the new tax break on up to 100 per week between them.'
The Government's Regulatory Impact Assessment on the scheme said, 'Some employees whose highest rate of income tax is the basic rate (22 per cent) who are currently benefiting from the NICs exemption on vouchers over 50 per week will lose, as the value of the limited tax and NICs exemption may be less than what they save on NICs at the moment. We estimate that the total number of employees who could lose out is likely to be less than 10,000.'
There are 30,000 parents using childcare vouchers for under-fives.
An Inland Revenue spokeswoman said one reason for the change was the mounting concern at the large sums people were putting into salary-sacrifice schemes and the impact that would have on their future pension and benefit entitlements. She added that the new regime would be more equitable, as more people would be able to benefit from the tax exemption because it was not subject to the upper earnings limit, unlike NI, although the benefit would be less for some people than now. The Inland Revenue has estimated that within five years the use of vouchers will have trebled.
Ms Ross said, 'The legislation is in place, so it is not going to change. We have to work around it. Overall, we are positive about the tax break because it is more than anyone else is doing in Europe. But on an individual basis, some people with high nursery fees will lose out.'