Childcare vouchers and tax relief
If you have a child that is cared for either by a nursery, crèche, play scheme, after school club, registered child minder; all of whom need to be OFSTED approved, then you may be able to claim childcare vouchers through your Limited Company under the Government childcare voucher scheme.
Your limited company would need to register the scheme with HMRC or use a scheme provider who will carry out the registration and administration process on your behalf.
Scheme providers charge a commission rate (varying between 2.5% upwards) for their service which your company can off-set against the savings in national insurance employer’s contributions. It is also a tax deductible expense.
A scheme provider is the easiest way to use childcare vouchers as there is a fair amount of administration and record keeping that needs doing initially, however, once the scheme is up and running you simply need to issue vouchers and maintain your records are up to date, so in a sense, paying a scheme provider just becomes money for old rope.
From 6 April 2005, the government implemented new tax and National Insurance exemptions to encourage companies to assist their employees with childcare fees.
By offering a childcare voucher scheme, employees are able to receive up to £55 a week (£243 per month) in childcare vouchers which will be exempt from tax and National Insurance Contributions (NICs). This is available to each parent or legal guardian.
An employee who is a lower rate taxpayer can save tax and NICs of £938 per year, and a higher rate tax payer around £1500. The amount paid out by a company in vouchers is also exempt from employers' NI contributions. So employers can save up to £300 per year for every employee on the scheme.
Childcare vouchers can be implemented either by way of a salary sacrifice scheme or as a normal business expenses.
Salary sacrifice happens when the employee agrees to give up part of his/her cash pay due under his/her contract of employment in exchange for childcare vouchers to the same value as the cash sacrifice.
If you make a claim using the salary sacrifice scheme your wage must remain at the minimum wage or above. Ensure you have an employment contract that reflects all the details.
If the employee receives tax credits then reducing their salary via ’salary sacrifice’ may also lower the amount of tax credits that they can claim. You can make a comparison here.
It will also make a difference on the amount an employee may claim for statutory sick pay and statutory maternity pay.
Alternatively, the employer may pay the childcare directly and deduct it against profits as an expense. Any additional salary will incur more employers NICs and payments made over the statutory exemption of £55 per week or £243 per month will be reportable on the P11d as a benefit in kind and class 1a NICs will be charged accordingly. Amounts paid at the approved rate or below are not reportable on the P11d.
The agency provider that you use will prepare vouchers (either paper or electronic) and will provide you with the templates for the variation of the employment terms for the salary sacrifice together with notification to HMRC.
There are certain conditions to be met for use of the scheme:
- The child must be resident with the employee. Thus the scheme is available to each parent or legal guardians.
- The scheme must be offered to all employees and literature must be displayed and made available as evidence.
- An employee’s salary must not fall below the national minimum wage or lower earnings limit after the salary sacrifice.
- Vouchers cover children up to the age of 15 and can only be used to pay registered and approved child carer’s e.g. registered childminders, nurseries, after school clubs, holiday clubs etc. Childcare vouchers cover children up to the 1st September after their 15th birthday or if the child is disabled up to the 1st September after their 16th birthday.
- If a relative is the child carer then they need to registered and also care for other children who are not related.
If you are a one-person Limited Company you are still eligible to administer a scheme.
Ensure that you have an employment contract stating the terms, either salary sacrifice or paid in addition to your salary and prepare literature that proves that the scheme is available to all employees.
How much to claim
Childcare is rarely as low as £55 per week so inevitably you will have a remainder to pay out of taxed income.
Or if, for example, your child care was £100 per week and the company pays for all of it, £55 is tax free, then the additional £45 you receive would be reportable on the P11d, NICs of 12.8%, £5.76 would apply and tax at the higher rate of £18, total cost of £23.76 for the extra £45.
Calculate this over the year, 45×52=2340 less 23.76×52=1235.52, total saving of £1104.48.
If you had not received the extra money and taken a dividend instead, you would save on the NICs element.
Before making a decision on whether the company or you pay, it is advisable to carefully calculate the true costs to both yourself and the company.
Phil Richards, Blevins Franks Ltd
- Guest blog post: self-employed? Here’s how to take control of your pension situation
- 2-Step Verification is here!
- What we’ve learned about Making Tax Digital from the new consultation documents
- Video: limited company directors’ responsibilities explained by HMRC
- Change to browser requirements