In a nutshell, some people using these government schemes designed to make childcare more affordable are actually potentially £100s or even thousands WORSE off and they don’t even know it.
The Low Incomes Tax Reform Group first alerted me to this, and back then we updated and clarified it in the site’s two guides. Yet I didn’t want to do a big ‘scandal story’ on it due to worry that it’d put many people, who rightly should be claiming these valuable benefits, off.
However, recently, as nothing’s happened, I turned the publicity temperature up a notch, and as my reply from the Secretary of State shows, it looks like things may finally move.
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 – 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 £1,000 of salary, which means losing £700 in your pocket after tax and National Insurance. In return you get £1,000 of vouchers to pay for childcare, meaning you’re £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 £40,000 can get these to help cover their childcare costs. The average payout is £68 a week or £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 £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 £100 a week in cash, they get £80 back.
Now imagine it still costs £100 but they pay £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 £40, just £32 a week.
This means the net result of this scheme can be a massive loss – 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 – 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.
Though at this point, let me say for many childcare vouchers make a massive saving so don’t automatically discount the scheme – read the full Childcare Vouchers guide.
This almost stopped me helping the govt…
For the last couple of years, I’ve done an annual radio morning with the Department for Children, Schools and Families (or its predecessor), to try and encourage many of the 100,000s missing out on the big cash available for childcare tax credits to grab it. It’s something I’m passionate about.
It involves doing a gruelling series of 30ish local radio interviews on the subject (tough to keep the enthusiasm up).
Quite deliberately I refuse the customary payment that tends to go to TV people for these things (though they aren’t normally giving info, they’re just doing publicity) and instead ask for a donation for the MSE Charity). That way I can have in my contract that I can’t be told what to say, though in advance I tell them my view so they can decide if they still want to go ahead (you’ll see I pulled out of one on Student Loans this year for just that reason).
This year in the build-up I kicked up a big fuss about this issue, as I hadn’t been quite aware of the extent of it the year before. Sadly one of the problems here is the two schemes cross over the Department for Children, Schools and Families and the Treasury – and it was surprisingly difficult to try and get info from them about how the schemes interact – even though I was doing a radio morning directly with them.
In the end they gave me the numbers I needed (ie some better guidance to what salaries the holes actually occurred at) and I went ahead. Yet while they gave me the info – it didn’t fill the hole completely.
Using the power of the News of the World.
I’m privileged to have my own page up front in the News of the World: it’s by far the UK’s biggest paper, so it’s great for spreading the MoneySaving message. Yet it also has huge political power and is difficult to ignore.
So quite deliberately in my piece on how to get money for childcare, I deviated from the normal format and after explaining the problem added this section in…
“What’s worse though, is how it’s communicated: this voucher danger is often hidden, and so many variables mean it’s impossible to work out yourself.
A month ago I bumped into Children’s Minister Ed Balls in the GMTV corridors, and warned him of this massive black hole. Like all politicians, he smiled and nodded. I then followed up by e-mail but have YET to receive acknowledgement of either…
So if you’re using vouchers and realise you’ve been losing out, let me know at email@example.com. Maybe it’ll help make Mr. Balls pay attention.”
Now the back story behind this is when I met the Minister at GMTV, it was brief and he was rushed (and I doubt knew who I was). I actually said to him “I’ve deliberately avoided going public on this, but it needs someone to do something” and echoed that in my e-mail. I’d decided to put it in print as I’d heard nothing.
I can’t say for definite it was the previous week’s News of the World column that did it, but at the end of last week I received the following reply…
We’ve been given full permission to reproduce this letter here
I’m grateful and encouraged by the reply and that it’s being taken seriously.
I must admit I’m not convinced voucher providers communicate this well (of course it’s not necessarily in their interest to as they make money from issuing vouchers), and this is certainly evidenced by the fact since writing the column people have contacted me saying they fell in this trap.
Yet even if they did try, the tax credit system is notoriously complex, and frankly I’m not sure how easy it is to get across.
However I’m pleased to say a meeting with the Financial Secretary, Stephen Timms, is now in m’diary.
What I’m going to say…
(It’s my hope this’ll be read at the Treasury pre-meeting to speed things along)
This isn’t a deliberate problem, it’s a policy hole partly caused, I believe, by the fact different schemes come from different departments trying for the same ends.
It seems to me there are a number of things that could be done to help. Most important is that no one loses money, I believe this needs doing both with more communication but also a change of policy… my three alternatives would be:
- Paying by vouchers shouldn’t change tax credit allowance. This would be the easiest system, and the hole would instantly disappear. However, of course it then means people are getting a double whammy of help – what I don’t know is how much this is likely to cost and that could be a sticking block.
- Paying by voucher should be neutral at worst. If the above doesn’t work, it should be incorporated into the system that there is no way you could be worse off if you use vouchers (ie the loss of tax credits is no more than the gain from vouchers) at least it would mean those who didn’t realise weren’t actually losing out.
- A one year amnesty on the impact. Alternatively the nature of the tax credit system means things are calculated at renewal roughly every July (see Tax Credit guide). Therefore someone who starts paying in childcare vouchers, often won’t be aware of the problem until it’s too late.
Therefore the first year this is done, there should be no reduction in tax credit, but at renewal the tax credit claimant should receive a notice telling them how much their credits are reduced due to using vouchers – so they can sort it for themselves in future years.
I’d greatly value your thoughts and suggestions before the meeting too via the link below…