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Last Updated: Wednesday, 10 December, 2003, 13:54 GMT
Q&A: Work-based childcare
A family
Some parents get help with tax credits

Changes to the tax incentives for employer-supported childcare have been announced in the pre-Budget report. BBC News Online examines what's at stake - and what it means for parents.

What's the big deal?

British parents currently pay the highest childcare bills in Europe.

According to the Daycare Trusts' 2003 Childcare Costs survey, parents in the UK face typical childcare costs of over 6,650 a year for each child.

In some parts of the country, the typical costs can reach more than 8,730 a year per child.

What rules are being changed?

About one in ten of employers provide some kind of childcare help to employees.

This can be in the form of childcare allowances or vouchers, subsidised childcare services or simply childcare information.

Childcare provided by your employer has always been free of National Insurance (NI).

However it was only tax-free if your employer both pays for the childcare and manages the facility itself.

Why change the rules?

It is all part of the government's wider political agenda of "making work pay" and redistributing wealth from the richer people to lower-income groups.

It wants every parent - not just the rich - to find suitable, affordable, and good quality childcare.

Middle to higher earners who are already benefiting from employer-supported childcare could lose out from the proposals.

Existing tax incentives, by default, tend to benefit these types of workers, because they are more likely to work for blue-chip companies with comprehensive personnel policies and their own workplace nurseries.

People in lower-skilled jobs, however, tend to have less choice how they balance work and home life.

They often use more informal forms of childcare, or they may work part-time for a number of employers, and can not benefit under the rules.

So, what has the government announced?

The good news is that other employer-supported childcare, not just childcare in work-based nurseries, but also vouchers, is to be free of tax and national insurance.

This will be very beneficial to people on lower incomes and in lower-skilled jobs because they often have less choice about how they balance work and home life.

It could also stimulate demand and encourage the creation of more daycare centres.

What's the bad news?

The government has capped financial support at 50 a week - well below the typical cost of 128 a week for a nursery place.

People who are already benefiting from other forms of employer help - not work-based nurseries - could end up paying more national insurance because any excess above the 50 exemption would be subject to tax and national insurance.

Some also fear that because it could increase the complexity and national insurance cost of providing childcare, some companies may stop some providing childcare at all.

The government, however, says capping childcare help at 50 would benefit more parents, while remaining affordable.

It would also not adversely affect salary sacrifice arrangements.

This is when an employee gives up part of their pay for a non-cash benefit such as childcare.

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