How to Stay Safe from HMRC
10 March 16 | By: Jas Jhooty
Tax free childcare has been delayed by court action and amended in the Autumn Statement. It’s now scheduled to be introduced in 2017. When it arrives how and when will it affect employer childcare schemes?
After lengthy consultation the government was set to launch tax free childcare in late 2015. However, a challenge to its legality was made by two companies who provide childcare vouchers for employers under the existing scheme. They lost their case, but going to the Supreme Court caused the introduction of the new scheme to be delayed until early 2017. In the meantime the Chancellor took the opportunity to make one or two changes.
In November 2015 the government announced changes to the parental income limits for tax free childcare. Under the original proposal both parents could have income of up to £150,000 per year to qualify. That figure has now been slashed to £100,000. The working hours requirement has also been changed. Both parents must now work at least 16 hours per week to qualify instead of eight as originally proposed.
The main terms and conditions of tax-free childcare are:
If you operate a free or subsidised crèche, nursery, etc. as a perk for your employees, the good news is that this won’t be affected by the new scheme. It will continue to be a wholly tax and NIC-free benefit in kind.
The bad news is that if you pay for or subsidise the cost of childcare for one or more of your employees’ children at an independent nursery etc. – one which is not at least partly financed and administered by you – the introduction of tax free childcare will spell the end of your scheme. However, there will be a transition period.
Your scheme can continue for employees already in it when tax free childcare starts, but no one else can join. Those in the scheme can remain in it until they choose to leave (so that they can receive tax free childcare instead) or no longer have children that qualify.
You may have no choice but to continue with your scheme as it’s likely to form part of your employees’ agreed remuneration package meaning that you can’t arbitrarily stop it.
Regardless of the contractual issues there’s a financial advantage (see below) to you as an employer in continuing with your childcare scheme for as long as possible.
Where you provide an Employer supported childcare scheme to your employees as part of their remuneration package you’ll have to compensate them with extra pay if they opt out of it. As a consequence the amount of NI your business will have to pay could increase by up to £400 per employee, per year. This is calculated as follows:
The maximum value of tax-free childcare vouchers an employer can give an employee in a year is £2,915 (£55 × 53 weeks). If instead they were paid as salary the employers’ NIC payable would be a maximum of 13.8% of that; i.e. £402.27.
Because employer childcare subsidy schemes are a partly tax and NIC exempt perk they can save you up to £400 per employee per year in NIC and salary costs compared with paying an equivalent amount of salary. Depending on their childcare costs your employees may be better off too. Our advice is therefore to encourage your employees to think carefully before switching to tax free childcare when it finally arrives in 2017.
To summarise, workplace nurseries won’t be affected by tax free childcare. Employer childcare voucher/subsidy schemes can continue for employees in them when tax free childcare starts. You should continue with these schemes for as long as possible as you can save pay and NIC costs of up to £400 per year per employee.
For more employment tax advice please do not hesitate to contact us.