Lies, damn lies and Childcare Tax Credits (2)

Continuing the theme of my previous post, from quango The Daycare Trust* comes this:

"New legislation is being introduced in April 2005 to encourage more employers to offer staff support with the cost of registered and approved childcare. It aims to encourage more employers to offer support with childcare costs through salary sacrifice schemes, either in the form of [tax-free] childcare vouchers [of up to £55 per week] or direct payment schemes."

Let's assume that one of the parents agrees with their employer that their gross wages will be reduced by £55 per week and they will receive tax/National Insurance-free nursery vouchers worth £55 instead - hoping, of course to save the PAYE on £55 (=£17, not to be sniffed at, you might think). The couple also dutifully complete and submit a revised Tax Credits claim form, which is promptly and efficiently processed by HMRC. Again, ignoring the income disregard, which makes a mockery of the whole concept, this is what the net effect will be (per week):

1. The parent's net employment income goes down by £55 less PAYE, or £38 per week
2. The nursery is happy to accept the £55 vouchers and reduces the weekly nursery bill by £55
3. The amount of £55 is deducted from nursery costs for purposes of the Tax Credit claim, but as only 80% of those costs are taken into account, the amount reimbursed via Tax Credits (before income taper) goes down by £44.
4. As the couple's gross income has gone down by £55 per week, the Tax Credit income taper goes down by 39% x £55 = £21

Once the dust has settled, the couple has lost £38, gained £55, lost £44 and gained £21. Overall they are £6 worse off. As it happens, the employer saves 12.8% x £55 Employer's NIC = £7, but the overall gain of £1 is nowhere near the administrative costs and hassle involved.

You can check this using HM Revenue & Customs Fun Online Calculator.

I've wrapped up the story here ... for now.

* As WOAR pointed out in the comments to an earlier post "In the accounts 2006 ... income came from: Unrestricted grant received from the Association of London Government £114,116 (see p.12) and ... Department for Education and Skills Surestart Unit £330,642, Inland Revenue £15,000. There are other headings which might be public sector but it is difficult to tell - the names or headings do not make it immediately apparent."