Understanding childcare tax breaks
Each parent in the UK is entitled to employer-supported childcare with a tax and NI free exemption of up to £55 per week or £243 per month. This is a Government-supported scheme, designed to make childcare more affordable for working parents. The benefit can be offered in three ways:
- Childcare vouchers
- Directly contracted childcare
- Workplace nurseries
The benefit is available to all parents with children under 15 years old who pay for childcare, whether it’s for a nursery, child minder, breakfast / after school club or even holiday camps.
Typically the benefit is worth around £900 per year, so if both parents are entitled to tax and NI free childcare support then as a family that’s a saving of £1800!
Can contractors benefit?
Yes, if you are a contractor working through a limited company then options 1 or 2 are available to you.
Many contractors opt for childcare vouchers as you can take the full tax-free allowance each month and save them up for use in the future (perhaps because your child is too young or if your childcare costs fluctuate throughout the year due to school holidays).
However the companies that provide the vouchers do charge an admin fee, which can be anything from 3% to 10%!
Directly contracted childcare
The alternative solution is for your limited company to contract directly with the nursery. This means paying the childcare from the business bank account on receipt of an invoice. However, in this scenario if you don’t use your full tax-free allowance each month the remaining benefit is lost.
Be aware that your limited company can pay the full value of your childcare costs, however if this exceeds the tax free limits then the additional amounts will be treated as a benefit in kind and subject to tax and NI deductions.
Things to consider
- The conditions are that the childcare provider must be approved (i.e. cannot be a friend or member of your family).
- Your limited company must pay for the childcare, either by buying the vouchers or contracting directly with the childcare provider, you cannot pay for the cost personally and claim it back as an expense.
- If you claim working tax credits then childcare vouchers may affect the amount you receive. Use the HMRC’s online calculator to help you decide whether overall you would be better off
- If your PAYE income falls into the high rate tax bands then you won’t receive the full benefit. Broadly speaking, basic-rate taxpayers can receive up to £55 a week (or £243 a month), higher-rate taxpayers can receive up to £28 a week (or £124 a month) and additional-rate taxpayers can receive up to £25 a week (or £110 a month). The earnings assessment is based on pay and benefits from your limited company and does not include dividend payments and therefore many contractors are still able to receive the full allowance of £55 a week.
For more information or to discuss your personal or business tax affairs give a4c a call today or send an email to firstname.lastname@example.org.