/Childcare Costs: Employers need to be more supportive

Childcare Costs: Employers need to be more supportive

Steve Herbert, Head of Benefits Strategy at Howden Employee Benefits explains why employers should support working parents with childcare costs.

“Families with two parents working full time at the National Minimum Wage are still 11% short of the income needed to raise a child.”

United Nations Report 16/11/18

Parenting is expensive in every respect.

It’s expensive in emotion and stress.  It’s expensive in time.  And more tangibly it’s damn expensive in terms of money.  In 2015 it was estimated that the cost of raising a child to age 21 was almost £230,000 in the UK.  Or, if you prefer, nearly £11,000 per year.

That’s a huge amount of cash for parents to find – particularly when the nation’s average salary is less than £30,000 per annum.  It’s also worth remembering that this cost is magnified if the family has more than one child.

So it follows that parents are increasingly keen to work just as many hours as they practically can to help meet their everyday costs.  But there is a paradox here, because the more hours parents commit to work, the more money they potentially need to spend on childcare also.

Of course the British Government is also keen to encourage more parents to remain-in or join the workplace too.  Their rationale is simple.  The more people in work, the less the burden on state benefits and the greater the income tax and National Insurance (NI) receipts.

The rise and fall of Childcare Vouchers (CcV)

To square both of these issues the (then Labour) Government introduced tax-efficient Childcare Vouchers in the early years of this century.  It was hoped that this move would encourage more working parents to return-to or stay-in the working environment.

The scheme allowed employees to “sacrifice” a portion of their earnings in exchange for an equivalent level of childcare vouchers.  The vouchers were then used to pay for a range of registered childcare.

The sacrificed amount of salary avoided income tax and employee’s NI stamp, so effectively reduced the childcare costs for the worker.  A nice bonus was that this same amount also avoided employer’s National Insurance payments too, and this saving was usually more than enough to cover the cost of the employer installing and operating a CcV scheme.

Yet the tax-efficient Childcare Vouchers scheme was not without its problems or critics, and importantly only supported those families where one or both parents were employed.  The self-employed were completely unable to benefit from this area of state financial support.

This was one of the reasons why in 2012 the Coalition Government announced a replacement to Childcare Vouchers.  However the new scheme – Tax Free Childcare – took far longer than expected to be introduced, and only became available under the Conservative Government in April 2017.  And even then there were some well-documented and well-publicised problems with the service.

So what is Tax Free Childcare (TFC)?

TFC is a far simpler scheme, and can be used by working parents that are either employed or self-employed.

The scheme does not require the support of an employer to operate, and also abandons the sometimes over-complex salary sacrifice mechanism in favour of a more simple savings top-up (equivalent to a basic rate tax saving).  The total value of the funds saved can then be used towards registered childcare costs.

Now it’s quite difficult to compare Childcare Vouchers and Tax Free Childcare because one is based on a per parent basis, the other per child in the family, and each has different maximum limitations.  But one important point worth noting is that the older scheme provides both tax and NI savings, whereas the newer one only provides a benefit equivalent to avoiding basic rate income tax.  It follows that CcV often provides a significantly better financial outcome for working parents.

So it was inevitable that there would be some families that would be better-off under the old Childcare Voucher system, and the Government therefore allowed a period of dual-running between the regimes until 4th October 2018.  Since that date only Tax Free Childcare has been available to support new savers with childcare costs.

An important point to note here is that those who joined a Childcare Vouchers schemes before October 2018 can still continue to utilise that offering.  This often remains a valuable benefit and financial saving, so employers should therefore think carefully before closing that arrangement.

How well is Tax Free Childcare working?

So now that TFC is finally up and running, how is it performing?  A recent Freedom of Information request by insurer Royal London suggests the answer is less than good.

The insurer has now established that the Tax Free Childcare system has actually paid-out just one tenth of the estimated (and presumably expected) first year costs.  And the number of parents using the scheme was only around 90,000 at the end of 2018 – compared to the 1.5 million families it was intended to support.

It clearly follows that there are an awful lot of working parents who are missing out on this valuable benefit.

Is this an employer problem?

Given that Tax Free Childcare is a state benefit, and doesn’t require the direct involvement of the employer, it’s quite likely that this subject has not been featuring much in the minds of many HR professionals recently.  But this is still very much a Human Resources issue.

The reality is that an employee that can’t make ends meet is less likely to be as engaged or as productive as their employer really needs them to be.  And the truth is that many working parents are really struggling.

I started this article with a quotation from the United Nations report on UK poverty which I believe is rather powerful.  But this from The Joseph Rowntree Foundation might be even more so:

“In-work poverty has been rising even faster than employment, with nearly all of the increase among working parents.  There are now four million workers in poverty”.

The four million figure equates to about 1 in 8 of the UK’s working population.  This is an absolutely appalling statistic for a developed nation.  And what makes this worse is that so many of this number will be families with young children to support.

The bottom line is that at most employers – even those with above average salary levels – there are likely to be at least some working parents really struggling financially.

What can employers do to support working parents?

Firstly – and importantly – if you still operate a Childcare Vouchers scheme for existing savers then aim to keep that operational!  Owing to the employer’s NI savings there is unlikely to be any costs for the employer in doing so, and the members of the CcV scheme will possibly be benefiting from a greater level of state support than under the new TFC system.

The second option is to regularly signpost your working parents towards the various other elements of state support for childcare costs.  That can be accessed via the Childcare Choices website, and includes details of free childcare for 2, 3 and 4 year old children, tax credits for childcare, universal credit for childcare, study support, and (of course) Tax Free Childcare also.

Finally, don’t overlook the other things that you as an employer can do to help your working parents.

Larger organisations sometime offer crèches or toddler clubs for the children of employees, but what of those organisations with far less scale or spending power?

Things to consider include negotiated discounted rates with a local nursery school or childcare provider, offering flexi-hours, and (where possible) the ability to work from home also.  And some employers now go out of their way to provide extra financial support and holiday entitlement to help mothers return from maternity leave as well.

Then there are low cost items such as the lifestyle, parenting, legal, and healthcare advice offered by many Employee Assistance Plans.  Or remote GP access so that employees don’t lose work time in trying to secure and attend an appointment for a child or other family member.

The reality is that the little bundle of joy often costs an unexpectedly big bundle of money over time.  It follows that HR professionals need to recognise this issue and do all they can to provide practical support to their parent-employees in 2019 and beyond.

 

 

Senior Editor Lisa Baker is the owner of Need to See it Publishing Group, providing contract news for business and news sites across the UK. Lisa is an experienced HR writer and commentator, editing HR publications for more than 5 years.