The extensions that were recently made to maternity entitlements have implications for employers’ childcare vouchers. Despite vouchers still being tax-efficient, they may not turn out to be as good a solution as first thought, when their costs are expected to go up so significantly.
Childcare vouchers work on the basis that employees are able to sacrifice a proportion of their salaries in place of childcare vouchers, which, up to a certain value, are non-taxable and exempt from national insurance contributions. Thus there are savings for both the employer and employee with these salary-sacrifice schemes.
But there are common misunderstandings about childcare vouchers in relation to maternity leave. Many organisations stop the provision of vouchers when an employee starts maternity leave, while others continue the benefit but only as long as they can deduct money from the employee’s maternity pay to cover the cost of paying for the vouchers. Neither of these approaches are correct, but since guidance over this has only recently been produced, it’s not that surprising.
Now, the guidan§ce from the HMRC says that salary-sacrifice schemes make a permanent change to an employment contract. Employees are entitled to lower salaries than they were previously earning, plus childcare vouchers. When the employees come out of the scheme, pay levels should then be renegotiated unless the original scheme dictated what would happen to pay when the scheme came to a close. The confusion arises from employers thinking that employees are entitled to their old, higher salary, with deductions taken from that to pay for the vouchers.
Since statutory maternity pay (SMP) is calculated by the average weekly earnings of an employee during weeks 17 to 25 of pregnancy, if the employee has a salary-sacrifice arrangement then this calculation should be based on the employee’s lower pay level. Hence, an employee’s rate of SMP is reduced during this period if they are receiving childcare vouchers. Similarly for those employers who are offering enhanced contractual maternity pay, so for example 100% of salary rather than 90% for the first 6 weeks of maternity leave, the rate of maternity pay can be calculated using the lower rate that applies if the employee is under the salary-sacrifice scheme.
But here is where money may become an issue: before changes were made recently to the Sex Discrimination Act, vouchers were only required to be provided during the 26 weeks of ordinary maternity leave, and not during additional maternity leave. Now, employers will have to continue to provide childcare vouchers for the full 52 weeks of ordinary and additional maternity leave. And an employer cannot deduct money from SMP to pay for the provision of vouchers, even if the employee has agreed to this idea.
Employers should avoid trying to fund childcare vouchers during maternity leave by other means. An example of this would be deducing the amount from contractual maternity pay or requiring the employee to reimburse the cost of the vouchers afterwards. Arrangements like this violate the Sex Discrimination Act, and so could potentially lead to claims similar to those that employers who stop providing childcare vouchers may face.
Most employees receive childcare values equivalent to £50 per week. Over the 52-week period of ordinary and additional maternity leave, this would cost an employer £2,600, and that notion may cause some employers to reconsider the benefits of offering childcare vouchers to employees.