The new rules detailed below 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 Government has announced that it intends to restrict the tax relief on childcare provided by employers to basic rate tax only with effect from April 2011.
The changes 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.
Please note that there will be no change to the tax and NIC exemptions for a third type of employer-supported childcare, the provision of workplace nurseries.
For those joining a scheme after 6 April 2011 an employer 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 exceed the 50% tax threshold, relief is given on £22 per week.
This will ensure that all employees receive relief of £11 a week, equivalent to basic rate tax relief at 20% on £55.
If the employee later finds that they were not actually a higher rate taxpayer, they cannot claim extra relief. On the other hand, if the employer gets the initial estimate wrong and the employee ends up with too much tax relief, the difference must be reported on a form P11D.
If you have any queries regarding the provision of childcare vouchers please do give me a call.