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If you want to pay for childcare costs through your limited company bank account, this can qualify for exemption from tax and National Insurance contributions. There are two ways you can do this: through a voucher scheme or through a direct agreement with a childcare provider.
From October 2018, no new applications will be able to join the Childcare Voucher Scheme. However, if you are already a member, you can continue to receive vouchers as long as your employer runs the scheme and you remain employed by that business.
You can purchase vouchers through one of the childcare voucher schemes which can be paid to employees. These vouchers can be used to pay a registered provider for childcare, who can then claim back the fees from the voucher issuer. There is usually a fee of between 2-5% which is paid to the voucher provider in order to cover the costs of the admin involved.
In order to meet the criteria for a childcare scheme, there are some conditions regarding implementation:
• Childcare assistance can only be redeemed through registered childcare providers
• The recipient of the childcare relief must be a parent, guardian or have parental responsibility for the child
• The employee can claim assistance until 1st September after the child’s 15th birthday (16th if they are registered disabled)
• If the childcare provider is related to the child, they must be registered, approved and run a legitimate childcare business which also cares for other unrelated children
Childcare payments made outside the scheme will not qualify for the tax and National Insurance Contribution exemptions, including:
• Any cash payments made to the 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 the company
• Payments made for school fees
• Payments made under the childcare scheme which do not meet the following criteria
• 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
As a limited company, you can pay for as much childcare on behalf of your employees as you choose to. However, 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 an employee joined the scheme prior to the 6th April 2011, 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 April 2011, 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.
When does the employer have to carry out the basic earnings assessment?
Since the 6th 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.
• Basic pay
• Bonuses, whether contractual or agreed
• Regional allowances such as London weighting
• Taxable benefits
• Shift allowances
• 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.
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.
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.
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|
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