A couple of weeks ago, MSE Wendy and I went to the Treasury to meet the Financial Secretary Stephen Timms MP (the man in charge of all things tax) to deal with what I think is a major problem with childcare finance. As I know there’s been huge interest in this (thanks for all the e-mails) I wanted to report back on how it went.
The Story So Far
There’s currently a black hole which means some people taking advantage of the government’s childcare voucher scheme, will actually lose money, because of their eligibility to tax credits.
As I blogged about in detail a few weeks ago… (see Ed Balls replies to my childcare agitation) having made this a political point in my News of the World column, Children’s Minister Ed Balls responded by setting up a meeting for me with the Treasury Minister in charge of tax, Stephen Timms MP.
"Why childcare vouchers can cost people money
Before explaining the problem, a quick definition of each of these government schemes (operated by two separate departments â€“ part of the reason for the problem I suspect):
Childcare vouchers. These enable working people to pay for childcare from pre-tax income. Eg You give up Â£1,000 of salary, which means losing Â£700 in your pocket after tax and National Insurance. In return you get Â£1,000 of vouchers to pay for childcare, meaning you’re Â£300-per-thousand better off (see full Childcare Vouchers guide for more).
Tax credits for childcare. Though the name’s confusing, tax credits are simply a payment you get into your bank account. Working families on incomes under roughly Â£40,000 can get these to help cover their childcare costs. The average payout is Â£68 a week or Â£3,500 a year, so this isn’t small potatoes (see Childcare Tax Credits guide for more).
So what’s the problem? Quite simply, for a substantial number of people with family incomes below Â£25,000 a year getting childcare vouchers REDUCES your eligibility for childcare tax credits; overall leaving you seriously out of pocket.
This happens primarily because the tax credits you get depend on the amount you pay out for childcare, yet paying in childcare vouchers doesn’t count towards that total.
So let me give you an over-simplified example…
Imagine a working family were entitled to 80% of their childcare costs in tax credits (ie the govt. pays that into their bank account). So if they pay Â£100 a week in cash, they get Â£80 back.
Now imagine it still costs Â£100 but they pay Â£60 in childcare vouchers (which of course they had to buy). So now, unbeknownst to them they’re only entitled to 80% of the remaining Â£40, just Â£32 a week.
This means the net result of this scheme can be a massive loss â€“ and that simply shouldn’t be allowed. Worse still, it actually means many who the childcare voucher scheme is intended to help are losing out â€“ leading it to be a benefit primarily for higher earners.
You may think "surely they’d know". Well, tax credits are only worked out once a year, and the system is so complex (think post-doctoral algebra), it’s virtually impenetrable for most people to understand why they get what they get.
We were met by the minister, two civil servants, his private secretary and the press team. The good news is that from the start, they seemed to want to try and tackle this and were genuinely interested in ideas.
We went in armed with a score of suggestions, both those outlined in my earlier blog and MoneySavers’ forum contributions which we’d printed out to distribute in the meeting. These divided into two main routes.
Fix the problem itself. Sadly most of these were ruled out on cost grounds, or that to change the interaction between the schemes in any way means changing the schemes itself, and that’s not a quick solution. As a practical point I thought it best to accept that during the meeting â€“ and keep them as longer term goals â€“ and move on to the second step.
Warning people about the problem. The biggest problem here isnâ€™t the black hole itself, which is simply a by-product of the interaction of the two schemes, but the fact so few people know about it and so many are caught out. So it became clear this was what to focus on.
There are two obvious nodes where the issue is mis-communicated: when people sign up for tax credits or at tax credit renewal; and when people sign up for childcare vouchers. At both these points it is crucial people understand the possible risk of taking childcare vouchers if they’re eligible for tax credits.
The end result
After about an hour long discussion, we came up with the following potential action plans:
Better indication of who’s impacted
They had already worked on a revised rule of thumb for us to use in the place of ‘family income below Â£25,000’ being better off not getting vouchers if getting tax credits
One child: family income under Â£22,000
Two children: family income under Â£27,000
Three (or more) kids: family income under Â£31,000
Though in all cases if childcare costs over Â£175 a week for one child or Â£300 a week for two or more children and then vouchers will probably be better – but for the levels of income that we’re talking about, spending this much on childcare is relatively unlikely.
A specific question on the renewal form
This is the one we lobbied most strenuously for. Initially it was met by a little reticence, as the information is currently detailed somewhere in the depths of the detailed ancillary pack with the renewal form.
Yet it seems to me, a question needs to be asked directly in the form itself, something like…
"Do you pay for childcare using vouchers issued through your employer? If so please read guidance note XYZ as some people who do this will be missing out on a substantial amount of tax credits."
This would indicate to people that there is a potentially substantive issue; which could then refer people on to the more detailed guidance section or better still the government website calculator.
They promised to look at what the forms currently say and whether it’s possible to amend them. My fingers are crossed it is, as having rejected the substantive changes to the scheme itself, this communicative change is surely the most important.
Improvements to the government calculator
Currently the calculator is clunky, unhelpful and difficult to find. The problem stems from the fact that when the government builds a tool it has to be perfect and have every single caveat and variable included. Yet with a complex issue like this it simply makes it unwieldy – and government website tools are already not the most user-friendly.
However it is a crucial tool to help with this issue, so we volunteered to help work with them to improve the tool. And at the same time will try and build our own ready reckoner version, which is much more simple but will then effectively tell you whether it’s worth bothering doing the government’s one or not.
Better info from the voucher providers
Having studied a number of voucher providers’ websites, the information about tax credits is there but it tends to be buried in a mass of information (though there are some examples of good practice) eg it’s hidden under a ‘salary sacrifice’ section rather than ‘tax credit’ section so people are not inclined to read it. This isn’t that surprising as of course childcare voucher providers make their money out of people taking vouchers.
HMRC are going to look at writing to voucher providers to try and make the information clearer. Hopefully the development of a better rule of thumb above should help this, and it would be great if all voucher providers would prominently display this information.
Even these small steps, should at least trigger a message in peoples’ minds, that if they’re using the two schemes they should check whether it is appropriate. Of course closing the black hole would be even better, but that requires a change in policy, and those things are never quick.
PS. Tax credits in general
While we were there, in passing, we did raise the issue of the ridiculous over complexity of the whole tax credit system and that weâ€™d love to feedback on it, illustrated with comments from the forum.
As well as the obvious problems, such as the system being designed so overpayments are commonly unavoidable, we were actually more concerned with the simple procedural problems, as these are actually solvable relatively easily, rather than policy changes which are about as easy to impact as the passage of a supertanker.
Our examples included the fact that people must choose whether to fill out the dispute or appeal form if they think they’ve wrongly been overpaid (the difference between what the two is something even those in the meeting couldn’t instantly put their finger on). Why isn’t there just one form?
Another major problem is that while the correct thing to do to prevent overpayment is to tell the tax credit helpline every time you have any change in circumstances, often people calling up with the info are told it isn’t necessary to register that information (technically true, as some information itâ€™s desirable to not compulsory to) and then end up with overpayments all the same.
I don’t envy Steven Timms the task of sorting this out, however Iâ€™m grateful they took it so seriously.