Vouchers are for dummies

Staff with childcare costs will sign up for financial help as a matter of course. Nick Golding finds childcare vouchers are a no-brainer for today\'s belt-tightening workers

There is no denying the fact that the majority of us are feeling the effects of the credit crunch and one of the best loved ways to help staff with families is childcare help for working parents.

According to the Day Care Trust’s Childcare costs survey 2008, the cost of nursery places for under two-year-old children in England is constantly rising and has grown from £120 per week in 2002 to just under £160 per week in 2008, making this a spiralling cost that shrewd employers may want to target.

Through offering a childcare voucher scheme at work via a salary sacrifice arrangement, employers can help working parents to save the tax and national insurance (NI) on up to £55 a week on childcare facilities. Setting up and running a scheme is cheap and easy to do, so offering the perk is simply a no-brainer.

Kate Brooks, client account manager at voucher provider Accor Services, explains: “This is something that all UK employers need to have on their benefits list. If people already have a weekly childcare cost to pay, this is a way of getting part of it tax and NI free.”

The setting up of a childcare voucher scheme is, in theory, very simple as it is just a case of an employer selecting a provider, and then allowing that provider to have a communication channel with participating employees at the company.

The provider then requires a sum of cash each month from the employee, in return for vouchers which can be spent on the employee’s chosen childcare arrangement.

If the employer makes the right choice when it comes to selecting a provider, any hassle of setting up a scheme can be minimised, says Paul Bartlett, head of reward and benefits at Grass Roots.

“If you have a ‘full service’ provider, and not all of them are, they will take on all the employee registration details and will also deal directly with the company payroll department,” he explains.

However, employers that think a childcare scheme can run itself may get a shock when one launches, because although keen providers will tell companies that the work is minimal, there are points where employer input is crucial.

For starters, this is a salary sacrifice benefit, which means staff are giving up part of salary to fund the vouchers, and such a deal requires a change in the employment contract for participating members.

What is more, a salary sacrifice scheme also means that changes need to be made to payslips each months so that individuals can see the reduction in salary and the changes to their tax situation, so the payroll department must be on board here too.

“Yes, there is some extra work for payroll to begin with. They will need to set up a code to be able to take dedications from gross salary and they will have to display this appropriately on the payslip. But once this is set up it is straightforward,” adds Bartlett.

At the set up stage there is also the issue of getting the scheme approved by HM Revenues and Customs (HMRC), who will want to ensure that the scheme is being run legally.

Though providers will encourage firms to allow them to deal directly with HMRC, benefit experts say it is best practice for the employer to be involved in this stage of the set up, simply because it is the company that will be punished should the scheme not be operating within the HMRC rules.

Martha How, head of reward consulting at Hewitt Associates, says: “I would feel very uncomfortable letting a provider set up and run a childcare voucher scheme without any input from the employer, I would urge employers to make sure that it is approved by HMRC and not to take a provider’s word for it.”

When in comes to the cost of set up, more often that not, employers can get it for free because many providers do not charge to set up a scheme.

The provider makes its money from running the scheme, which will involve promoting it to staff, encouraging new employees to take part, and organising the sending out of vouchers to staff etc.

Providers will charge the employer a varying amount for administrating the scheme to staff, but this cost can be covered form the NI savings that the company makes during the salary sacrifice process.

“For the employer, the NI savings will be up to a maximum of 12.8 per cent and then roughly speaking the administration fee, though difficult to say, is about two thirds of the employer’s NI savings,” explains Bartlett.

So, in some instances the savings are good enough to leave the employer with money left over once they have paid their scheme provider for their services.

Kent County Council makes such large savings from its various salary sacrifice benefits that it can afford to make contributions to other employee benefit schemes with the saved cash.

Jane Vivier, reward adviser at Kent County Council, explains: “Even after paying the provider, we still make huge NI savings and in fact the savings from schemes such as childcare vouchers are all contributed towards paying for other benefits.”

However, as with all benefits there is the potential for extra costs where they are least expected, and although providers claim that this is a cost-neutral perk, there are occasions where the employer could feel short-changed.

For instance, the employer must decide whether it wants to use the electronic voucher or the paper voucher from the start, and both carry their own, potentially costly, problems.

The traditional paper-based voucher operates under a simple process: The employee informs the provider how much he or she wants to spend a month on vouchers, the provider records the payment, and then the appropriate number of vouchers are posted to that employee for them to spend on a childcare arrangement.

Sounds simple enough, but with a less than reliable postal system and the occasional untrustworthy staff member, vouchers can go astray somewhere between the provider and the employee, and it is often the company that picks up the bill.

“The bad news for paper vouchers is that they can get lost in the post and an employer would have to respond to this eventuality.

“Most of the time if it gets lost the employer will refund the voucher at no cost, but if they get lost three or four times the employer needs to have a policy in place. Of course, everytime the employer refunds the voucher it is an additional cost for that company,” explains How.

Even though the emailed electronic voucher removes the danger of postal loss, they are commonly only effective payment for one particular carer, as opposed to the paper vouchers which can be used across multiple sites and are more like cash.

So if an employee has two children attending different clubs or nurseries, the paper voucher can be used like cash at both, but it is worth considering that the electronic voucher may require two different accounts to be set up by the employee one transferring the voucher to one carer, and one transferring the voucher another carer.

Such a system is capable of causing internal administrative headaches, not to mention expense, especially in a large organisation where employees’ situations, such as change of address and therefore change of carer, alter on a regular basis.

“Generally the electronic vouchers are specified for certain carers and work like a Bacs transfer, so the employee could end up having two sets of records for two sets of vouchers,” adds How.

If running smoothly however, it seems that the childcare vouchers are a truly valued benefit, as they have the ability to save employees a vast sum of money on a very necessary expense.

According to the Employee Benefits/Towers Perrin Flexible Benefits Research 2008 some 93 per cent of employers in the UK now include the vouchers in their flex scheme, which goes some way to explain how much it is valued.

“Most employees would be looking for childcare vouchers at a company if they are working parents, and this is something that UK employers need to have on the benefits list, because it could stop someone from moving or joining a company,” says Brooks.

For the employer, the vouchers may even contribute towards encouraging an employee to return to work after having a child, and so the employer can look to make substantial savings in terms of recruitment and training if it can lure new parents back to the workplace.

“They hold a huge amount of value for us, I think it actually makes the difference between [new parents] coming back to work and not coming back to work [after the birth of a child],” says Vivier. But a scheme like childcare vouchers needs to be nurtured if the most value is to be drawn from the perk, and companies need to promote and communicate the benefit enough so that employees understand the complex rules and the savings that can be made.

Not all employees will understand how salary sacrifice works and the section of employees that are likely to be interested in a voucher scheme will constantly be changing as members of staff inevitably become parents.

So, the communication process needs to be constant if the right members of staff are to be reached.

“The employer will have to get involved at some stage of the promotion and communication process. As with any benefit, you get a return based on how well you promote it,” explains Bartlett.

The childcare voucher scheme has the potential to add real value to a benefits package, especially if it is well promoted and communicated to staff who are not familiar with terms like salary sacrifice.

But, as with any benefit, if left to its own devices or not set up in the correct way, the value will deteriorate over time, so it is up to the employer to acknowledge the vital role that it must play in the running of a scheme, and also make good use of the many enthusiastic providers in the market n

Childcare researchcase study
Jane Vivier, reward adviser at Kent County Council

Kent County CouncilKent County Council runs a childcare voucher scheme for its 44,000 employees and works alongside its provider each month to make sure that the scheme is running smoothly.

The council’s provider sends over a spreadsheet each month with the list of employees that want to take part, and the council approves this and sends it back.

To encourage take up of the scheme Kent County Council highlights the potential savings that can be made by staff that take part.

“If we can say ‘we’ll save you £1,000 per parent per year by using vouchers’ it can be an effective way to market the product. It’s the cold hard cash approach that they want,” explains Vivier.

And when it comes to promoting the scheme, the council’s workforce size and turnover level means that constant communication is necessary to ensure that nobody misses out.

“Turnover means that we need to keep promoting it, we tend to do it seasonally so for instance summer is coming up so we’ll promote summer holiday clubs to those members of staff with children,” Vivier adds.

• 97 per cent of childcare service providers, such as nurseries or pre-schools, across the UK are willing to accept childcare vouchers as a form of payment.
• Half of childcare service providers reported that they now receive vouchers as a form of payment.
• Almost a quarter – 24 per cent – of childcare service providers have reported that the number of children in their care has risen Source: Accor Services’ Childcare Provider Survey 2007 since the government introduced the tax break on vouchers.
• Over half – 52 per cent – of childcare service providers have seen no rise in the number of children using their services since the government introduced the tax break on vouchers.
• Just 4 per cent of childcare service providers do not accept childcare vouchers as a form of payment.