The next step

http www hmrc gov uk calcs ccin htm

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http www hmrc gov uk childcare childcarefactsheet htm

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What’s the real deal on childcare vouchers?

On their way out?

It’s estimated that the current childcare voucher scheme saves 340,000 families up to £2,392 p.a. But at the Labour Party’s Annual Conference in September the Prime Minister said he intended to scrap tax relief on them, and instead to extend the number of free nursery places currently available.

Under attack

This proposal prompted a backlash and after “careful consideration” he has since announced a U-turn. The scheme will stay (for now) but with changes to how it operates. So how is it going to work and what can be saved?

Salary sacrifice

At present, employees can sacrifice up to £243 p.m. in return for vouchers. These are exempt from tax and NI, provided the weekly amount claimed doesn’t exceed £55 p.w. If it does, the excess is liable to deductions in the usual way.

Tip. For tax purposes, the exemptions are calculated over a 53-week period, not 52. There’s a useful calculator on the HMRC website so you can see how it works (see The next step).

Employee’s tax savings

By opting for the scheme, employees who pay tax at the basic rate can save themselves up to £17.05 p.w. (or 31% x £55) per week. Higher rate taxpayers can save up to £22.55 p.w. (or 41% x £55).

Tip. Provided their employers each participate in a scheme, both parents are entitled to claim tax relief - it doesn’t just go to the mother.

Employers better off too

In turn, the employer will also make savings on its own NI contributions of up to £7.04 p.w. (or 12.8% employers’ NI x £55) per employee.

Total. Because of the 53-week rule the potential employers’ NI saving per employee could actually be £373.24 p.a. (£243 x 12 = £2,916 x 12.8%).

Cutting the scope

However, what the government will now do from April 2011 is remove the higher rate tax relief altogether. Employees will still be able to participate in an employer’s scheme after then but they will only get tax relief at the basic rate, regardless of their earnings.

Tip 1. If you don’t currently have a scheme but set one up prior to April 2011 any higher rate taxpayer will still benefit from the existing rules and so will you (see The next step).

Tip 2. For those of you who already run schemes, your existing participants will be unaffected by the change.

Warning

The government has threatened to withdraw the scheme entirely from 2015. It remains to be seen if this will actually happen - but until then there’s nothing to stop you benefiting from the potential employers’ NI savings.

For a link to the HMRC childcare voucher calculator (PS 12.02.03A) and for details on how to set up a scheme (PS 12.02.03B), visit http://personnel.indicator.co.uk.