Government concession on withdrawal of tax relief for childcare vouchers

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The Prime Minister announced on 3 December that the Government’s plans to withdraw tax relief for childcare vouchers will be withdrawn and that tax relief on childcare vouchers will remain, albeit at the basic rate of tax for employees first taking vouchers after 2011.

The Prime Minister had previously announced at the Labour Party conference that he was phasing out tax relief on childcare vouchers from 2011, with a view to completely withdrawing the relief by 2015. This was due to Government concerns that there was a disproportionate benefit to higher rate taxpayers and to fund the creation of 250,000 free nursery places. Following a sizeable petition lodged on the 10 Downing Street website, a parliamentary motion defending the vouchers, and concerns raised by employers and their advisers these plans have now been scrapped and a new concession announced.

Under the current rules parents can sacrifice salary that would otherwise be liable to tax and National Insurance (NI) and receive childcare vouchers in exchange which, up to a current limit of £55 per week, are exempt from tax and NI. Under the concession parents using an existing arrangement will continue to obtain tax relief at the basic or higher rate of tax depending on their level of earnings but employees first taking vouchers after 2011 will have their tax relief limited to the basic rate of tax.

Although the concession will be welcomed by employers and many employees it does mark the withdrawal of a valuable higher rate tax relief for employees currently earning more than approximately £43,000. Employers may want to consider their plans to introduce childcare voucher arrangements following further details being announced in the Pre-Budget Report on 9 December.

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