With a low penetration and a tangible benefit, David Casson points out that childcare vouchers can be a profitable product in the IFA's range
The uproar caused in September 2009 when the government announced plans to remove the tax savings on childcare vouchers, and the subsequent reversal of this policy after pressure from parents and businesses, is a clear demonstration of the high value placed on childcare vouchers as an employee benefit.
According to childcare charity The Daycare Trust, families pay on average between £7,000 and £8,000 a year for a full-time nursery place. Childcare costs are a topical and emotive subject and are often a principal driver in influencing an employee's decision in regards to selecting and purchasing other financial products and services, or dictating the amount they pay into a pension scheme.
Ignored benefit
Despite this impact on wider benefit spend, for manyintermediaries childcare vouchers remain a benefit that is ignored, not understood, or seen purely as a direct to market product. The reasons for this are most likely a lack of engagement in the intermediary market from providers of childcare vouchers and that traditionally there has been limited earning potential from the product.
In fact childcare voucher providers, such as kidsunlimited, can provide intermediary facing childcare voucher schemes that will pay commission on a per life basis and renewal commission at the anniversary of the policy, regardless of company size.
In the face of competition in the more traditional product markets squeezing margins and earning potential there has been considerable interest from intermediaries seeking new ways of providing added value for their clients, looking for door opening conversations and ultimately generating additional revenue streams into their businesses.
Childcare vouchers are a benefit that provide savings for the employer as well as the employee. There is usually no charge to set up a scheme and the company does not pay National Insurance contributions on salary exchanged through salary sacrifice for childcare vouchers. The employer saves on average £200 to £300 per annum in NI contributions for each employee who elects to join the scheme.
Intermediaries can use these savings to generate opportunities to discuss benefit spend, help strengthen clients' cash flow and/or help offset wider intermediary consultancy or administration fees. Employees who are lower rate tax payers can benefit from tax savings of up to £900 per year, while for employees in the higher rate tax bracket the figure is currently just under £1200.
The administration process for childcare vouchers involves the employee checking that a registered childcare provider will accept childcare vouchers and then deciding the amount of monthly salary they wish to exchange for vouchers. Employees can opt for any amount between £10 and £243 per month to be collected from gross salary. On or around payday the employer sends these deductions over to a childcare voucher provider. The voucher provider will process the payment and either pay the nominated childcare provider directly, or hold the money in a secure online account for the parent to utilise as needed.
The childcare voucher provider will make a small charge to the company to administer the scheme, usually around 5% of the total monthly value of the overall company voucher transactions. The company offsets this charge against the National Insurance savings they make and normally will still make a substantial saving.
Working tax credit limits
While childcare vouchers provide thousands of working parents with a means of paying toward their childcare costs there are factors that should be taken into account when a company is looking to implement a scheme. In addition to National Minimum Wage restrictions, if parents are in receipt of the childcare element of Working Tax Credit, then depending on their circumstances, taking childcare vouchers may have an impact on the level they receive.
The HMRC has an online calculation tool and helpline to assist parents in making an informed choice. If an employee currently taking childcare vouchers goes on maternity leave the company would, under the Sex Discrimination Act (SDA) and the Maternity and Parental Leave Regulations, need to take over the Childcare voucher contributions on their behalf.
This could mean in some situations the benefit actually ends up costing the company money. This must, however, be balanced against long term savings and providing employees with a paternalistic and tangible benefit they will use on a regular basis and cannot access from the high street.
Incentives
Childcare vouchers can also help incentivise employees to return to work or reduce absenteeism by providing savings toward the costs of childcare provision. This can potentially deliver significant ongoing saving for clients against recruitment and lost production costs and complement work life balance and wellbeing strategy.
With around 350,000 parents accessing childcare vouchers via 35,000 company schemes they are already a very well established employee benefit. Research by kidsunlimited suggests that while access to childcare vouchers are frequently provided to employees of national and large corporate companies (although this is not to say opportunities to review existing schemes or implement new schemes do not exist) the SME market 3-500 employees has less than a 15% level of penetration. Therefore, opportunity exists for intermediaries to explore with existing and potential clients the benefits of a childcare voucher scheme.
David Casson is sales manager at kidsunlimited
