The Do’s and Don’ts of providing a childcare scheme

With the squeeze on household incomes continuing, childcare costs can prove a significant part of a working family’s weekly budget.

These days, there are very few benefits employers can provide for their employees without triggering an income tax and national insurance bill. However, a contribution towards childcare costs can still be attractive, despite changes made in last year’s budget.

This concession doesn’t just to apply to large employers who run an on-site crèche facility –it can equally apply to much smaller husband and wife limited companies where two lots of £55 per week may be available to assist with childcare costs.  This can save tax of £572.00 and employer’s national insurance of £394.68 per annum for a basic rate taxpayer.  These rules apply to employees including company directors of family businesses. Sadly, they do not apply to sole traders and partners of unincorporated businesses.

It’s relatively straight forward to put a childcare scheme into place, you simply need to adhere to guidelines laid down by HMRC, as errors can be costly particularly if a number of employees take advantage of the scheme.

To take the strain, there are providers of voucher schemes, although the costs associated with the administration can put some smaller businesses off.  However, it’s perfectly possible to use your own business vouchers, providing it’s clear what the process is.

Employers can also contract directly with a childcare provider but it must be the employer who makes the contract, not the employee.  If you’re thinking about setting your own scheme up, it’s worth spending a bit of time with a professional.

So, what small print has HMRC put in place for voucher schemes and direct contracts with providers?  Basically to gain exemption from tax and national insurance, the following conditions must be met:

  • The employee’s relationship with the child (generally a child or stepchild of the employee who is maintained at least partly at the employee’s expense)
  • The qualifications of the childcare establishment (by a person registered under Part 3 of the Childcare Act 2006 or on the premises of a school that is required to be inspected by OFFSTED outside of normal school hours; or a domiciliary care worker under the Domiciliary Care Agencies Regulations 2002)
  • The availability of childcare to all employees (with special rules relating to lower paid employees who are prevented from joining a salary sacrifice scheme by the minimum wage)

This is a summary of the necessary conditions and you should consult either the HMRC manual or seek further advice.

It’s worth noting that the £55 per week does get reduced for entrants into schemes from 6 April 2011 when employees pay more than the basic rate of tax, but particularly in small family businesses, dividend tax planning can assist in maximising the contribution.

Employees should always check the impact on any tax credits before signing up because this can influence the decision to accept assistance with the costs of childcare.

So how does a business pay for this? Well, depending on the structure of the business this can either be done as an ‘extra’ (remembering that it needs to be available to all employees) or by salary sacrifice which needs to be implemented properly by amending contracts of employment paying due attention to minimum wage.

In summary, a lot of smaller businesses don’t realise they could be saving tax and it’s definitely worth investigating whether assisting employees with childcare costs is right for your business.  More information is available at http://www.hmrc.gov.uk/paye/exb/a-z/c/childcare.htm but always seek professional advice before implementing a childcare scheme – mistakes can be costly!

By Nigel Gorski, The Business Springboard.

Nigel Gorski is a chartered accountant. As well as running his own accountancy practice, he is a specialist trainer in finance and business planning at Leeds based business training company, The Business Springboard. For more information, visit www.thebusinessspringboard.co.uk.