Clause 36 - Childcare: salary sacrifice etc and the national minimum wage

Finance (No. 3) Bill – in a Public Bill Committee at 9:45 am on 24th May 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I have some fairly brief comments to make on clause 36, which amends the limited exemption for qualifying child care vouchers in the Income Tax (Earnings and Pensions) Act 2003 to relax the requirements for any child care scheme to be generally open.

At present, employees on or near the national minimum wage cannot benefit from any salary sacrifice scheme that would bring their earnings under the legal limit. That remains true under clause 36. It is important that people on the minimum wage are protected from back-door attempts by employers to reduce the amount that they are paid.

Many of us will have encountered situations in our constituencies over the years in which employers provide rented accommodation or food for restaurant workers, which actually has the effect of undercutting what the people are paid, because those things are, in effect, deducted from their wages or seen as payment in lieu of wages. It is important that we maintain the legislative protection for people on the minimum wage who would be vulnerable to such attempts to reduce the amounts that they are paid. Again, that remains true under clause 36.

The regulations for employer-supported child care and child care vouchers, which are included in ITEPA 2003, however, mean that an employer can offer a child care scheme with tax relief only if the scheme is open to all employees. Under existing legislation, that means that employers cannot offer it to any employees if some are on or near the minimum wage. The fact that some employees are paid the minimum wage in an attempt to protect them actually means that the employers are prevented from offering the scheme to anybody, which, people would accept, is an unfair provision and something that ought to be changed. Clause 36 changes  that, so that employers are not prevented from offering a salary sacrifice tax-relief scheme to other employees simply because they cannot include the workers on the minimum wage.

I can see the advantages of extending the provision so that more working parents are entitled to the child care vouchers. There are some concerns, however, about the Treasury’s reasoning, which, according to the explanatory notes, is

“the alternative availability of the childcare element of the Working Tax Credit” to employees on or near the minimum wage, in most cases. That is the child care element that the Government have just reduced from covering 80% of child care costs to covering 70%, representing a loss of up to £1,560 a year for some families. At the same time, the Government have chosen to freeze the basic and 30-hour elements of working tax credits, to freeze child benefit and add £450 to the average family’s annual bills with the VAT increase.

Consequently, when considering clause 36, it is important to note the low incomes tax reform group’s advice to working parents, which stated:

“For the last few years we have been warning that if you were on a low or middling income and able to recoup most of your childcare costs through tax credits, it would usually be to your disadvantage to start receiving childcare vouchers from your employer in exchange for a reduction in salary. From 6 April 2011 the rules change so for some low-income people there may now be a small advantage in taking vouchers.”

It went on to cite the

“less generous help in tax credits” as the reason for the change in advice.

It should also be remembered that parents working fewer than 16 hours a week are not entitled to working tax credits, and consequently do not receive help with child care. I have spoken to young mothers in my constituency who work with the Prince’s Trust on issues around helping them to get back to work, and they have raised this as an obstacle. Before the reduction of working tax credit to 70% of child care costs, the charity Gingerbread was campaigning for an increase to 100%, arguing that this would cost

“£420 million but would have a much lower net cost as it would help parents to access employment.”

I do not necessarily advocate that, but Gingerbread raises an important alternative viewpoint. It also cited a 2008 study indicating that only one in 10 working tax credit recipients take up the additional child care support, which they partly attributed to the complicated eligibility criteria. That is an important issue for the Government. Given that the take-up of child care reliefs is so low, the balance between whether the provision of child care vouchers by employers is an easier alternative that would result in better take-up, and whether it would have administrative problems, is significant.

I accept that the alternative—tax-exempt child care vouchers—is not available to the lowest earners, or consequently to any of their colleagues, and that the point of the clause is to make the vouchers more widely available. I am concerned with ensuring that reducing the “generally open” requirement does not mean that the needs of working parents with lower earnings are neglected.

Does the Minister have any information about the number or proportion of employers that would like to offer salary sacrifice vouchers but are prevented from doing so, or whose schemes cannot include tax relief because they employ people on or near the minimum wage? I say “prevented”, but that is not necessarily the case, because employers have the option of offering a salary plus arrangement, which can provide a much needed supplement to a parent’s low pay.

Will the Government give us an indication of the prevalence of such arrangements? It would be troubling if clause 36 withdrew any incentive for employers to offer this benefit, and if workers on the minimum wage lost out as a result. Would employers be more likely to offer salary sacrifice vouchers than salary plus vouchers? That might have an impact on people close to the minimum wage.

Affordable child care can make the difference as to whether a parent can work or not. That is why, recently in the House, I asked the Minister at the Department for Work and Pensions, the right hon. Member for Epsom and Ewell (Chris Grayling), about worrying reports that Jobcentre Plus offices tried to impose sanctions on single parents on jobseeker’s allowance because they were only looking for work that fitted around their child care needs. Given that single parents whose child has reached the age of five are expected to look for work from next year, and reports that Jobcentre Plus is not showing the flexibility that it should, in order to keep the claimant count down, the availability of affordable child care will become increasingly important.

What estimate has the Treasury made of the number of employers who will offer vouchers as a result of the clause? My concern is that this will not prove sufficient, and that the Government do not have a coherent plan for child care, particularly following the cuts to Sure Start and working tax credits. As was noted during the discussions on clause 35 and schedule 8, the previous Labour Government planned to redistribute child care support and invest in places for younger children from lower-income backgrounds. Although the Government are continuing with the reduction in relief for higher earners, there is no commensurate investment for lower earners.

The previous Labour Government set ambitious targets to reduce child poverty, and lifted 600,000 children out of poverty. The child care policy, if implemented, could have contributed to continuing this trajectory, but instead we have the OECD and the Institute for Fiscal Studies warning that Government policies could push another 300,000 children into poverty. We would, therefore, appreciate further information from the Minister on plans to support working parents more generally, and whether the Government have a coherent strategy to ensure that all parents can access affordable child care.

The Department for Business, Innovation and Skills launched a consultation on flexible working and parental leave, but the potential benefits for parents will not be available for another four years. In the meantime, the Government have removed new employment rights for workers in micro-businesses, so child care will remain a priority for working parents struggling to balance their commitments. Although working tax credits make a significant contribution, I have highlighted why we should be cautious about thinking that they are the  solution to all the problems of working parents, especially as the future of tax credits and the child care element are in doubt, given the introduction of universal credit.

This week’s Gingerbread and Resolution Foundation report has raised fears that child care changes with the universal credit could mean that working parents lose 94p in every pound if they increase their working hours. Given that the explanatory notes emphasise the role of the child care element, what steps will the Treasury take to ensure that parents on low incomes know that they can access it and what help will it offer to encourage them to apply? Another recent Gingerbread report concluded that changes to the tax credit system this April have

“significantly, blunted the incentives to remain in work for the majority of single parents who are currently claiming tax credits”.

Has the Treasury considered that report? It would be helpful to know whether it had held any discussions with Ministers or officials in the Department for Work and Pensions about the impact of clause 36 on working parents and the provision of employer-supported child care.

The Bill refers to “relevant low-paid employees”, defined as those employees for whom, if they were part of a salary sacrifice scheme, their remuneration

“would be likely to be lower than the national minimum wage”.

The “likely to” seems rather vague and imprecise. Who is expected to be the judge and what evidence will they use? If a decision is not to be based on exact calculations, is the Minister satisfied that workers will not be wrongly excluded from a tax-relief scheme? How much will clause 36 cost the Treasury if more parents qualify for tax relief? The Bill allows for it to be introduced retrospectively from 2005-06, so how does HMRC plan to implement it?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Clause 36 amends the condition on employer-supported child care to be generally open. The shadow Minister has run through some of the situations that we seek to address through the clause. It should enable some employers to make their child care schemes more available to their employees by removing the restriction that applies to those employees at or near the minimum wage.

Employer-supported child care is a benefit provided by employers to help their work force with child care costs, and it is valued greatly. The Government support it with a limited exemption from income tax and a national insurance disregard. Many employer-supported child care schemes are offered through salary sacrifice or flexible remuneration packages. The hon. Lady asked how the salary sacrifice scheme will relate to salary plus arrangements. Employers will be able to offer a mixture of such schemes to their employees, so hopefully there will be additional flexibility. Where employer-supported child care schemes are offered through salary sacrifice or flexible remuneration packages, working parents who earn the minimum wage, or near it, cannot join their employer’s scheme, because making deductions from a person’s salary or earnings that lead to them being paid less than the minimum wage is prohibited.

The minimum wage rules are in place to ensure that the wage is at least at or near the minimum wage. At the same time, unless employers make their employer-supported child care schemes available to all employees, except for  in exceptional circumstances, the existing tax exemption does not strictly apply, so we have ended up with employees caught between minimum wage legislation and the conditions needed to allow for the tax and national insurance contribution exemptions from employer-supported child care. The changes made by the clause will rectify that anomaly.

The clause will allow employers to meet the “available to all” conditions and thereby continue to offer schemes through salary sacrifice or flexible remuneration arrangements. We know that many parents with earnings at or near minimum wage are already excluded from employer child care schemes. That reflects the Low Pay Commission’s 2006 report, which

“concluded that childcare voucher schemes would benefit few low paid workers; the majority would be better off claiming support for childcare through the Working Tax Credit system.”

Although this might seem to be a reduction in support for low-income parents, I think the shadow Minister recognised that in practice it corrects an anomaly between the minimum wage legislation and the conditions in place to encourage employers to provide employer-supported child care; it should not have any real effect.

I stress that the majority of working parents paid at national minimum wage levels are already eligible for support with their child care costs through the child care element of the working tax credit, which, in many cases, is more generous than employer-supported child care would have been. The changes are being made retrospectively to put widespread practice on a proper footing and to allow us to make the appropriate amendments to the national insurance contributions legislation.

The hon. Lady asked about the impact on employers. These clauses have been out for consultation since December 2010. The clauses and the explanatory documents were perhaps worded clearly, but we received no responses asking for further clarification or challenging the Government’s rationale. We are amending the law to reflect a problem that employers had to address themselves in a way that did not stack up with the contemporary legal situation. Hopefully, clause 36 will ensure that we reflect the reality faced by employers. In practice, the clause will not remove any child care support from working parents. Conversely, it will allow employers to meet the conditions required to continue to offer this tax relief to the 450,000 parents who currently benefit from the scheme.

The hon. Lady asked more broadly about what the Government can do to support child care. We in the Treasury worked alongside the Department for Work and Pensions to develop the recently published White Paper. The White Paper contained a commitment to developing a system of support for child care costs that will work alongside the universal credit when it comes in. We will ensure that that support is maintained as the broader legislation on supporting families, particularly working families, changes.

The hon. Lady also asked about the impact on child poverty, and she talked about the recent OECD report, which is interesting. She will be aware of our child  poverty strategy consultation, which we have now published. How we talk about child poverty, and the breadth with which we talk about it, is a challenge. Is it purely about income, or do we want more measures that address a wider definition of child poverty? It is perhaps not only about the financial poverty in which children may find themselves, but about emotional poverty and poverty of opportunity, too.

Alongside the OECD report, the IFS has done some work, which the hon. Lady briefly mentioned. The IFS analysis is not directly comparable with Treasury forecasts, but I draw her attention to the fact that the Office for Budget Responsibility has looked at the past two Budgets and said that there will be no measurable increase in child poverty. I think I am right in saying that the OBR has said that, if anything, the measures we brought forward in the Budget would result in a small decrease in child poverty, albeit a decrease so small that it is not statistically significant.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury) 10:00 am, 24th May 2011

As the Minister said, the past two Budgets have been assessed as not leading to an increase in child poverty; there may be a statistically insignificant decrease in child poverty. Does she think that that is adequate, given that both Government parties signed up to the Labour Government’s pledge to abolish child poverty by 2020?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

The child poverty strategy consultation is now under way, and I hope that we can have an informed and balanced debate. That is one of the reasons why we are pleased that the right hon. Member for Birkenhead (Mr Field) has provided his input.

I can see Opposition Members rolling their eyes. We need to debate not just the financial aspect of child poverty but the broader issues that we must tackle in terms of support for early years, and particularly for disadvantaged children. They often face disadvantage far more broadly based than simple income targets. The right hon. Member for Birkenhead and many others are clearly saying that we need a broader-based strategy if we are to reach our longer term 2020 target. I hope that we can stand away from just having a debate on a statistic, important though it is, and remember that behind that there are children whose lives we want to change for the better.

Perhaps I can give one final example of what I mean. By raising personal allowance over the course of this year and next, we will take over 1 million people out of income tax altogether. The impact of that will be to raise average incomes ever so slightly. Because child poverty is worked out as a median relative indicator, that change will see more children technically slip into child poverty. Those extra children will suddenly be defined as being in poverty, but will go to bed that night unaware of any change in their circumstances. That shows that, while statistics do matter and should be looked at, if we are to make a real difference to children’s lives that they actually notice, which surely is the main point of this, we need a broader-based strategy and a broader argument about where investment can be best placed to ensure that we make a difference on the ground.

Question put and agreed to.

Clause36 accordingly ordered to stand part of the Bill.