CHILDCARE TAX & NATIONAL INSURANCE CONTRIBUTIONS

New Tax and National Insurance Contribution exemptions were introduced on 6 April 2005 to encourage employers, including those who have never done so before, to help their employees with their childcare responsibilities and better balance their work and family commitments.

As a consequence of the Government’s childcare strategy, employees have been able to make tax and national insurance savings on their childcare costs since April 2005. This is something you should consider as an employer or employee.

Childcare Vouchers
As an employer, if you give your employees childcare vouchers, the first £55 a week of the cost of providing the vouchers to each employee is free from both tax and NICs if the qualifying conditions are met.
These are:

• That your childcare voucher scheme is generally available to all of your employees where the scheme operates; and
• That your employees can only use the childcare vouchers to pay for childcare that has been registered or approved.
• A child qualifies up to the 1 September following their 15th birthday (16th birthday if they are disabled) if they are the child or stepchild of the employee concerned.

Other Childcare Support
If you provide childcare through a third party, a tax and NICs exemption similar to the one for childcare vouchers applies. The first £55 a week of the cost of the childcare you provide is exempt from tax and NICs, providing the scheme meets the same qualifying conditions.

Benefits For Your Employees
The legislation means great savings on childcare costs and also further tax savings on PAYE & NIC.
Here is an example which illustrates the savings employees could make in the new tax year, based on the following assumptions:

1. Annual childcare costs £4500 per annum, (£375 per month)
2. Not contracted out of State 2nd Pension Scheme
3. Tax and National Insurance contributions savings on £55 per week, (£238 per month) via a ‘salary sacrifice

Basic Rate Taxpayer	Higher Rate Taxpayer
Annual Earnings £20,000	Annual Earnings £40,000
Tax Saving (£238 x 22%) £52.36 per month	Tax Saving (£238 x 40%) £95.20 per month
NI Saving (£238 x 11%) £26.18 per month	NI Saving (£238 x 1%) £2.38 per month
Total Saving £78.54 per month	Total Saving £97.58 per month
Worth nearly 11 weeks free childcare per year	Worth over 13 weeks free childcare per year

In both instances the employer saves NIC of £30.46 per month (£238 x 12.8%).

It could be beneficial to your employees to offer them childcare benefits under a salary sacrifice arrangement, but you will need to make sure that this is set up effectively for tax and NICs purposes. By sacrificing a portion of their salary in return for the vouchers they will be better off by paying less PAYE and NICs than previously as the example above shows.
NB. You should note that the £55 limit applies to each individual employee. It is not affected by the number of children in the employees’ family in childcare.

Voucher Options
You have 2 options when using childcare vouchers:
1. Voucher provider companies can operate childcare voucher schemes on behalf of employers. They will charge an administration fee for the service and there are many different companies to choose from.
However, you will remain responsible for the correct deduction of tax and payment of NICs even if you use these companies.
2. You can provide and administer childcare vouchers yourself as long as you make sure the conditions for tax and NICs exemption are met and you keep records to support your scheme.