An update from Simon Parsons

Childcare changes for 2011

Changes for employer supported childcare are on their way, starting from April 2011. Firstly Gordon Brown announced its end, and then after employer and industry lobbying with associated public backlash, the government tracked back and announced alternate changes on 3rd December 2009 to the tax and NICs exemptions for employer supported childcare.

Since 6 April 2005, the new tax exemption and revision to prior NIC disregards have been applied to two forms of employer supported childcare:

• Employer contracted childcare – where an employer arranges for the provision of qualifying childcare
• Childcare Vouchers provided by the employer for qualifying childcare.

The government’s supposed family friendly policies were not about employee purchase, but about giving benefit tax relief on employer provision and support - sometimes this is now referred to as a “Salary Plus” arrangement where an employer provides benefits in addition to normal salary. There is no tax relief on employee purchasing childcare.

However, salary sacrifice, where the employee and employer contractually agree to reduce earnings (in exchange for receiving an alternate employer provided, free of charge, non-cash benefit), has become the popular end result of applying the relief, while making the arrangement either cost neutral or, in some cases, cost beneficial to the employer.

Originally, the relief was set at £50 per week (monthly was based on £50 multiplied by 52 weeks divided by 12 months). This changed from April 2006, when the amount was increased to £55 per week (and monthly basis was changed to £55 multiplied by 53 weeks and then divided by 12 months).

This supplemented the former scheme, which saw the employer provision of workplace nurseries being tax and NICs free, and the former provision of childcare vouchers being exempt from NICs only for any value allocated to the employee.

This new 2011 arrangement will change the Tax and NICs treatment for employer contracted and childcare vouchers for individuals who newly join a scheme from 6 April 2011. All pre-existing arrangements and members continue with their existing relief, as long as the employee remains in the scheme. Workplace nurseries are not impacted.

The government takes the view that “it’s only fair that those on higher incomes should get the same level of income tax relief as the majority of parents”. The limit on the amount of exempt income will be restricted where an employee’s earnings and taxable benefits are liable to tax at the higher (40%) or additional (50%) tax rate.

From 6 April 2011, for all new joiners and then annually, employers will have the added burden of estimating employees’ earnings and taxable benefits. If they fall below the sum of the personal allowances and the basic rate limit for the year, the employee can receive up to £55 per week of tax and NIC free employer supported childcare.

If the earnings estimate exceeds the personal allowances of the individual plus the basic rate tax band for the whole year but fall below the additional (50%) rate limit, the employee can receive up to £28 per week of tax and NIC free employer supported childcare.

If the earnings estimate exceeds the additional (50%) rate limit (currently £150,000 for the year), the employee can receive up to £22 per week of tax and NIC free employer supported childcare.

The values of £28 for higher rate tax payers and £22 for additional rate tax payers have been set to ensure that all employees receive the same level of tax relief as those who are basic rate taxpayers (£11 per week).

The employer is now required to assess the earnings at the beginning of the tax year or when the employee first applies to join the employer supported childcare scheme. The tax and NICs exempt limits are then set at that point even if earnings later fluctuate up or down or even if the employee leaves part way through the tax year.

The earnings to be used in the estimated calculation are contractual wages or salary, including taxable benefits in kind, but does not include overtime or bonuses. If the employer scheme operates salary sacrifice, the estimate has to be made on post salary sacrifice earnings (on the reduced pay amount) although this may be confusing on whether to reduce in relation to CCV the amount of  £2,915, £1,484 or £1,166 in the estimation.

If vouchers exceeding the tax free amounts are provided to the employee then things get complicated. In strictness of the HMRC rules, the amount over attracts Class 1 NICs through payroll, but the tax liability forms part of P11D reporting.