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16 March 2016

Tax-Free Childcare

There was a minor update on Tax-Free Childcare, which is set to be introduced in early 2017 and will replace the existing Employer Supported Childcare scheme (childcare vouchers). We now know that there will be a phased roll out of the new scheme, with the youngest children being eligible first and all families becoming eligible by the end of 2017. 

The existing childcare vouchers scheme will remain open to new entrants until April 2018 rather than being closed when the new scheme is launched. This gives families a little longer to decide whether or not they will be better off staying in the existing scheme or moving over to the new one.  

As a reminder, the new scheme allows parents to save up for childcare using a new account, where every £8 saved by the parents is topped up by £2 from HMRC.  This allows parents to save up to £10,000 per year (£8,000 from the parents and £2,000 from the government) for each child.

Termination payments

There is to be a tightening of the rules on termination payments, which the government has identified as an area open to manipulation by employers. It was confirmed that the £30,000 exemption for termination payments will remain, but that the scope of the exemption will be reduced.

Payments in excess of the £30,000 are already subject to income tax. It was announced that from April 2018 they will be subject to employer’s (but not employee’s) national insurance contributions too.  

Salary sacrifice

Not unexpectedly, it was announced that the government is considering limiting the range of benefits that attract tax relief as part of a salary sacrifice arrangement. Salary sacrifice works by allowing employees to trade a deduction in their gross pay for a range of benefits, saving income tax and NICs. If the benefits are taxable and subsequently declared on P11DS, the income tax and employer’s NICs are clawed back, but the employee’s NICs are not, which can resulting in significant savings. 

The government’s intention is that salary sacrifice for pensions, childcare and health-related benefits such as cycle to work should not be affected, but we can expect changes for other arrangements, such as accommodation and company cars.