Payroll Advice

Childcare Vouchers and Payroll

How do I treat childcare vouchers on the payroll? If for example someone has GBP 500 worth per month, I used to just deduct that from their gross pay and that was that. Now I am being told that part of that amount is tax and NIC-able.

The answer to your question depends on whether you are deducting the amount from net pay as an employee purchase of childcare vouchers, or whether you are in reality treating the childcare vouchers (CCVs) scheme as a benefit in kind salary sacrifice arrangement where the employee has agreed to have their earnings contractually reduced.

Employee purchase of childcare vouchers through the employer receives no tax or NICs relief and is purely a voluntary deduction from net pay.

You do imply a deduction from gross pay of the full amount which is incorrect. CCVs used to only have NICs relief on the full amount and no tax relief as the benefit was fully reportable on form P11D.

However, approved childcare (e.g. a registered and inspected childminder) can be paid by the employer either directly or through CCVs up to the amount of GBP 55 per week (GBP 243 per month) from 6th April 2006 with no tax or NIC liability falling on the employee.

In the case of CCVs, any amount of benefit received - face value of the vouchers, not the cost - exceeding these limits are NI-able through the payroll and taxable through form P11D under non-cash vouchers.

The HMRC are fairly flexible on how salary sacrifice arrangements are acted through the payroll, what they do insist on is the existence of the contractual change. If the employer cannot show a contractual change then they may find the experience a little expensive as they will be met with a potentially significant tax and NIC bill.

If the scheme is purely the employee purchasing childcare vouchers, then deduct the GBP 500 from their net pay as a voluntary deduction. There is no change.

If the scheme is a salary sacrifice scheme, then the employee has actually reduced their pay by an agreed change to the contract. Assuming that a contract change is held by the employer, this arrangement can be shown in a number of ways through the payroll.

The reality is that HMRC do not mind how a salary sacrifice arrangement is presented on the payslip or through the payroll, as long as the contract successfully shows salary sacrifice and that the correct amounts become taxable and NIC-able through the payroll and the form P11D.

If this case were a true salary sacrifice, GBP 243 per month of the benefit in kind would be tax and NICs free. The other GBP 257 pounds of benefit strictly has a Class 1 NIC liability through the payroll and a GBP 257 tax liability through the operation of form P11D. Some employers may choose to tax at source this benefit amount through the payroll itself. If this is the case then you may consider a deduction of GBP 243 from gross pay and a voluntary deduction of GBP 257 from net pay.

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