If you wish to pay childcare costs directly from your limited company bank account then it can qualify for exemption from tax and National Insurance Contributions, and this guide will explain how to organise your payments to comply with the relevant regulations.
If you wish to pay childcare costs from your company account, then there are two ways to do so; either via a voucher scheme or through a direct agreement with a childcare provider, both of which are explained below:
These schemes involve the purchase of vouchers through one of the childcare vouchers schemes such as Kiddivouchers, Edenred and Faircare which can be provided to employees. These can be used to pay a registered provider for childcare, who can then claim back the fees from the voucher issuer. There is usually an admin fee of between 2 and 5 per cent which is paid to the voucher provider in order to cover the costs of the admin involved.
The alternative is that the company can agree to pay a registered childcare provider directly for childcare which is then available to your employee. This can be done through a relatively simple process of setting out the agreement between employer and employee in a letter which sets out the amount that your company is willing to spend on childcare on the employee’s behalf.
The voucher scheme is usually easier for employees to use, but because of the admin fees charged by providers it is slightly less cost-efficient. Whichever option you decide to pick, the childcare fees must be paid directly from the business bank account.
How do you qualify for a childcare scheme?
In order to meet the criteria for a childcare scheme, there are some conditions regarding its implementation:
- Childcare assistance can only be redeemed through registered childcare providers
- The recipient of the assistance must be a parent, legal guardian or have parental responsibility for the child in question
- The employee can claim assistance until the 1st of September after the child’s 15th birthday (or 16th birthday if they are registered disabled)
- If the childcare provider is related to the child, then they must be registered, approved and run a legitimate childcare business which also cares for other unrelated children
Payments made outside the childcare scheme will not qualify for the tax and National Insurance Contribution exemptions, including:
- Any cash payments made to employees to help them with childcare costs
- Paying childcare bills incurred by employees directly when invoices are issued in the employee’s name rather than that of the company
- Payments made for school fees
- Payments made under the childcare scheme which do not meet the qualifying criteria
The kind of childcare which is included in the scheme is:
- Registered childminders, play schemes and nurseries
- Out-of-hours clubs which are run on school premises by a school or local authority
- Childcare schemes run by approved providers
Any business that participates in the childcare scheme will need to keep full records to demonstrate that all the conditions have been met, which should include:
- The name of the child and their date of birth
- Full details of the childcare provider, including their registration or approval number
- The expiry date of their approval
How much childcare can you provide for an employee?
As a limited company, you can pay for as much childcare on your employees’ behalf as you choose to, although there are certain tax and National Insurance implications which will be affected if you exceed the published limits.
When a company determines how much childcare they can provide but still qualify for tax relief, there are a number of factors to be taken into account, with the most significant being the date on which the employee joined the company’s childcare scheme.
If the employee joined the scheme prior to the 6th of April 2011, then their employer can pay for £55 per week or £243 a month which will be free of tax and National Insurance Contributions.
If the employee joined the scheme on or after the 6th of April 2011, then the amount of childcare that their employee can pay for will depend on their basic earnings, as relief is restricted for those who pay the higher or additional rates of tax.
The Basic Earnings Assessment
When does the employer have to carry out the basic earnings assessment?
Since the 6th of April 2011, any employee who wants to join an employer’s childcare scheme will need to have a basic earnings assessment carried out at the point where they join and then annually at the start of every tax year. This assessment then applies for the whole of that tax year, but it cannot be deferred until the employee’s P11D form is complete with the final information on their taxable benefits – you have to base it on the information available at the start of the tax year. Similarly it cannot be based on the previous year’s earnings and must be completed by the employer as opposed to the employee.
Earnings and benefits to be included in the basic earnings assessment
- Basic pay
- Bonuses, whether contractual or agreed
- Regional allowances such as London weighting
- Taxable benefits
- Shift allowances
Income that is excluded from the assessment:
- Performance related bonuses or those which are discretional
- Payments for overtime
- Benefits which are already exempt from tax such as pension contributions
The guidance provided by HMRC does not specify how dividends should be treated in this situation, so it is reasonable to assume that they are not included in the calculation because they are generally not considered to be a form of remuneration.
Any change to an employee’s earnings over the course of the year will not change the allowance they have for childcare in the current year, but it may affect their future allowance when the assessment is done at the start of the next tax year.
An employee who is hired part way through a tax year will be assessed on the basis of their projected earnings, with no reference to previous earnings. So an employee who joins a company 6 months into the tax year and is expected to earn £25,000 by the end of the tax year will be assessed as earning £50,000 over the course of the year for the purposes of the childcare assessment.
What happens if the employer gets the basic earnings assessment wrong?
If an employer makes a genuine mistake in their assessment based on the best information available to them at the time it was carried out, then it will still be considered valid for the twelve month period for which it is intended to apply. HMRC will consider any exempt figures based on this assessment as correct for the purposes of completing the P11D.
If an employer who gets the assessment wrong because they failed to take into account the information that they had available at the time, meaning that an employee benefits from a level of relief to which they were not entitled, then HMRC can assess for any additional tax that is due. An employer can also declare any additional relief that has been received by submitting details on the P11D form.
Basic earnings assessment record keeping requirements
HMRC requires employers to keep full and detailed records of their basic earnings assessment calculations, because although they do not need to be sent to the department, they will expect them to be available to them if they ask.
There is no set format for these records but they need to include the details that were used to calculate the basic earnings assessment. HMRC’s employer compliance work will usually involve checking this information, so it is important to ensure that these records are clear.
Tax/NIC exempt amounts
Once an employer has completed a basic earnings assessment of an employee, the next step is to obtain how much you can provide under the tax/NIC exemption. This will depend on the results of your assessment and whether the employee is a basic, higher rate or additional rate tax payer. The thresholds are as follows:
|Rate of income tax||Weekly exempt limit||Monthly exempt limit||Annual exempt limit|
If there is any confusion over the level of childcare that you can provide, it’s best to check with an expert to avoid any mistakes being made. A standard letter about contracting childcare might follow this format:
Amazing Consulting Limited
99 High Street, Sometown, AT12 1AB
We agree to purchase childcare from you to the value of £55 per week from 4th September 2015. We intend to give the childcare as a benefit to our employee, Peter Smith for use by his son, James.
This agreement may be amended or cancelled if Peter Smith leaves the employment of Amazing Consulting Limited.
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