The law – Childcare vouchers

Posted on September 28, 2015

Many employers provide employees with childcare vouchers as a benefit of their employment, usually by way of a "salary sacrifice" arrangement, which has certain tax and NIC advantages to both the employer and the employee.

There is some uncertainty over whether an employee's entitlement to childcare vouchers continues during maternity leave in addition to SMP. This has arisen because of confusion about whether the vouchers should be treated as part of the employee's "remuneration" (which does not continue during maternity leave) or as a non-cash benefit (which must continue).

"Remuneration" or non-cash benefit?

During OML (and now AML), the employee is entitled to all the usual benefits of her employment, except her remuneration, which is replaced by SMP or the employer's own maternity pay scheme. Remuneration is defined as "sums payable to the employee by way of wages or salary" (regulation 9, MPL Regulations).

As there have been no test cases on this issue, it is not known with any certainty how childcare vouchers should be treated under the MPL Regulations. The fact that the vouchers are non-transferable and cannot be converted into cash by the employee suggests that they cannot be considered "wages or salary". In any event the vouchers are not "sums payable to the employee", but a future promise to pay a sum to a third party in return for services to the employee. This interpretation strongly suggests that they should be maintained throughout maternity leave in the same way as any other contractual benefits in kind.

In its Guidance on statutory maternity leave - salary sacrifice and non-cash benefits, HMRC is clearly of the view that childcare vouchers are non-cash benefits rather than "remuneration", even if they have been provided by way of salary sacrifice. This view has remained constant since 2008 when HMRC first published guidance on the issue, which was later updated.

The result is that:

The value of the childcare vouchers should not be included when calculating salary for the purposes of SMP entitlement; and
The employee is still entitled to the childcare vouchers during her maternity leave without sacrificing any of her SMP.

HMRC is clear that where SMP only is paid employers cannot offset any of the cost of the vouchers against SMP. Any agreement to exclude or modify an employee's entitlement to SMP would be void (section 164, Social Security Contributions and Benefits Act 1992). SMP must therefore be paid in full for 39 weeks.

This interpretation adds considerable additional costs for employers, who will have to fund the childcare vouchers during the whole of maternity leave with only a small saving in SMP during the first six weeks.

Initially, at least, some of the companies that administer childcare vouchers apparently took a different view to HMRC, and considered the vouchers as merely an alternative way of paying salary. At least one such company had suggested that the employer might include appropriate contractual wording to make it clear that the employee is only entitled to vouchers during weeks in which she is in receipt of sufficient salary to cover them. However, if HMRC's view is right, such wording would be open to challenge as an unlawful attempt to contract out of regulation 9 of the MPL Regulations.

Implications of the uncertainty

There was anecdotal evidence in Autumn 2008 that the potential additional cost of having to fund the vouchers during maternity leave was causing some employers to consider discontinuing the provision of childcare vouchers to employees altogether. By May 2009, it was reported that the British Chambers of Commerce was advising its members to do just that (see BBC News, 30 May 2009, Parents may lose out on tax break).

However, employers should look at the figures carefully before deciding whether it is necessary or even financially prudent to withdraw entirely from providing childcare vouchers. On a rough-and-ready analysis, it only takes eight "working" employees participating in the scheme to save the employer enough NICs to offset the cost of providing vouchers to one employee on maternity or adoption leave.

Childcare vouchers: cost/benefit

The following is a rough and ready calculation which assumes that the employer only pays SMP, and that each employee participating in the scheme would take the maximum tax-free entitlement of £243 a month (£2,916 a year) in childcare vouchers. This ignores any administration costs associated with the voucher scheme.

Saving of employer's secondary class 1 NICs on £243 (at 13.8%) per "working" employee = £33.54 per month.
Cost of providing vouchers to employee on maternity, paternity or adoption leave = £243 per month.
Number of participating "working" employees needed to offset cost of voucher to employee on maternity leave = 243÷33.54 = 7.25.

Therefore, provided there are, in an average month, more than 7.25 participating employees in work for every participating employee on maternity leave, the childcare voucher scheme should still produce direct financial benefits to the employer. This is to say nothing of the indirect benefits of providing participating employees with up to £1,195 annual tax saving, and the loss of good will that could result from withdrawing it.

Whether employees actually choose to continue to receive childcare vouchers maternity leave. Women may choose to opt-out of receiving childcare vouchers because of the implications on the amount of SMP they receive or because it is more advantageous to them to claim the childcare element of Working Tax Credit instead. Where salary has been reduced in exchange for the childcare vouchers, normal weekly pay for the purposes of calculating the first six weeks of SMP may also be reduced. Some employees may prefer to receive a higher rate of SMP during the first six weeks of leave to receiving the childcare vouchers. Also, some women choose to take their children out of childcare when they are on maternity leave and so will not want childcare vouchers.

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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