GOVERNMENT REVAMPS CHILDCARE TAX TREATMENT (04/03/10)

Higher rate tax payers will feel the pinch from the Government’s plans to restrict the tax relief on childcare provided by employers to basic rate tax only.

HMRC has recently published a paper, Reform of the Tax Treatment of Employer-Supported Childcare, which explains how the restriction will work.

Originally in 2009 the Prime Minister announced that the tax and National Insurance (NIC) exemptions for childcare vouchers would be withdrawn completely. However the Government later changed its mind and announced that tax relief will continue but that from April 2011 it will be restricted to the basic rate.

The change in rules will apply to the following types of employer-supported childcare: 

• Employer-contracted care, where the employer arranges directly with a registered provider to offer qualifying childcare to employees.

• Childcare vouchers provided to the employee by the employer for qualifying childcare.

Both of these are currently free of tax and NICs on the first £55 per week.
 
There will be no change to the tax and NIC exemptions for a third type of employer-supported childcare, the provision of workplace nurseries.
 
The new rules will start from 6 April 2011 but will only apply to individuals who join a scheme on or after that date. They will not apply to employees already in schemes by that date.
 
The restriction under the new rules will work as follows. Employers will first have to make an estimate of the employee’s ‘basic employment earnings’ for the tax year; this includes pay and taxable benefits but excludes potential bonus and overtime payments. The employer must do this when the employee joins the scheme or at the start of a new tax year.
 
The figure of basic employment earnings, after deducting the personal allowance, then determines the amount of employer-supported childcare on which the employee gets tax relief:

• If the earnings are within the basic rate band, the employee is entitled to relief on (up to) £55 per week.

• If the earnings exceed the 40% tax threshold but not the 50% one, relief is given on £28 per week.

• If the earnings exceeds the 50% rat threshold, relief is given on £22 per week.

The end result is that tax relief at their top rate of tax on the qualifying amount will give all employees relief of £11 a week, equivalent to basic rate relief at 20% on £55.