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Upcoming Childcare changes

Upcoming Childcare changes

May 2010, we reported proposals by the government to make changes to employer supported childcare. HM Revenue and Customs (HMRC) have now confirmed that these proposals are to proceed - impacting childcare vouchers and directly contracted childcare provision.

Currently, any vouchers or direct contracts that are provided as an employee benefit (including those in a Salary Sacrifice scheme) are exempt from any PAYE or P11D tax, Class 1 or Class 1A National Insurance Contributions (NICs) for the first £55 per week or £243 per month.

How is this currently handled by payroll teams across the UK? Generally childcare provision isn’t. What often is handled is the salary sacrifice along with its impact on tax and NICs.

Annualised “basic earnings assessments” (BEA)

As of April 2011, employers will be required to undertake an annualised “basic earnings assessment” for all new joiners.

• Those employees whose earnings are judged to be Basic (20%) rate (the earnings do not exceed the allowances and the basic rate thresholds) are entitled to £55 per week or £243 per month.
• Those employees whose earnings are judged to reach Higher rate (40%) are entitled to £28 per week or £124 per month.
• And those employees whose earnings are judged to reach Additional rate (50% due to exceeding £150,000) are now entitled to £22 per week per month.

Some questions remain on how that actual assessment is to be undertaken, especially with regards to use of the tax free allowances.

So, who is considered to have joined prior to 6th April 2011?

• Those employees who have submitted an application to the employer before 6th April 2011 and who meet the qualifying conditions.
• An employee who has not received his/her vouchers by 5th April 2011, they may not necessarily be considered as a new joiner if they have already applied and are entitled to them at this date.
• Annual renewals and some breaks (referred to as temporary cessation of up to 12 months) do not invalidate someone from already being part of a scheme prior to 6th April 2011.

The Basic Earnings Assessment (BEA) is carried out at the point of joining the scheme and then annually at the start of the tax year. The assessment then remains in place for the whole of the tax year and is not influenced by any change in circumstance. Employers must keep records of the calculation to be available for inspection by HMRC if requested.

The BEA includes the following (always judged on an annualised basis):

• Basic pay as stated in the contract of employment
• Contractual bonuses
• London weighting and regional allowances
• Taxable benefits
• Shift Allowance

The BEA does not include:

• Performance related pay or discretional bonuses
• Overtime payments
• Earnings or benefit exempt from tax such as Pension, share scheme and charitable giving.

How is the BEA calculation to be performed?

This activity is required to be carried out on application to join the scheme. It will require a judgement to be made by the employer with information that may not be readily available.

Employers need to review their childcare schemes to ensure compliance. Salary Sacrifice arrangements need to be reviewed and revised to operate the appropriate amount of tax and NIC reduction. The correct assessment of any consequential benefit in kind, whether that is assessing Class 1 NICs through payroll, taxing the benefit at Source or the provision required for reporting on P11D.

Could the scheme close to new joiners?

No. If it did, the childcare benefit no longer qualifies for Tax and NICs relief - as it is no longer available to all.

The proposal has raised many questions and challenges which have been submitted to HM Revenue and Customs.