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Question: What are the rules for tax and NICs relief on childcare vouchers?

Payroll Tip: New statutory provisions affecting both the tax and NICs liabilities on the provision of childcare as an employment benefit were introduced from April 2005. The legislation draws a distinction between three different ways in which childcare benefits may be provided, namely

• 1. childcare provided by the employer on the employer’s premises.




• 2. childcare provided by the employer through external childcare providers.




• 3. childcare vouchers for employees to redeem at nurseries of their choice.

Each of these provisions has it own, somewhat complex, statutory rules. This article will consider the rules for the third of these ways of providing childcare, i.e. where the employer provides childcare by means of vouchers that can be used by employees to pay for their childcare at local nurseries. A childcare voucher is a non-cash voucher, i.e. a voucher, stamp or similar document or token, used to obtain the provision of care for a child.

Employers may simply provide vouchers as a fringe benefit. However, as not all employees need childcare vouchers, they are more commonly provided as part of a salary sacrifice scheme, where employees agree to a contractual reduction in their salary in return for childcare vouchers to the value of the salary reduction. The tax and NICs relief provides savings for both the employee and the employer.

There are a number of different schemes that employers can use, each with advantages and disadvantages. They can be run in-house or the services of a voucher scheme provider can be purchased.

• The employer arranges with local nurseries and childcare providers for them to accept vouchers presented by his employees. The employer settles the charges direct with the childcare providers. This may be cheaper than commercial schemes but all of the administration falls on the employer.




• The employer contracts with a commercial childcare voucher provider. The employees order the vouchers through the employer or direct from the provider, the employer pays for them and they are sent direct to the employee. The employee presents the vouchers to the childcare provider in exchange for the childcare and the provider returns them to the scheme provider for payment.




• The employer contracts with a commercial voucher provider for the provision of virtual vouchers, or “e-vouchers”. The employer orders and pays for the e-vouchers and each employee is given an online account that is credited with the value ordered. The employee can transfer funds from the account, by telephone or Internet, direct to the childcare provider of choice in order to obtain the childcare services.

The tax and NICs relief on “qualifying childcare vouchers” is limited to a maximum of £50 of benefit for a “qualifying week”. If the benefit exceeds £50 per week in value, a liability to tax and Class 1 NICs arises on the excess value. However, all of the following conditions must be met if a non-cash voucher is to be treated as a “qualifying childcare voucher”:

• the child must be a “child” or “stepchild” of the employee, resident with the employee and maintained wholly or partly at the employee’s expense.




• the employee must have parental responsibility for the child.




• the “childcare” obtained with the voucher must be “qualifying childcare”.




• the scheme must be open to the scheme employer’s employees generally.

The requirement for the childcare vouchers to be used only to obtain “qualifying childcare” places a heavy burden on the employer if the conditions for tax exemption are to be met. In whichever country of the UK a childcare voucher is used to obtain childcare, the childcare must be registered or approved under the local legislation and it must not be of a kind that is excluded. If the care is not “qualifying childcare”, a liability to tax and Class 1 NICs arises on the full value, not just on the excess. It is very difficult for employers to determine whether a particular type of childcare qualifies, especially for employers that provide childcare vouchers for use throughout the UK – and a mistake could be costly. Employer’s Help Book E18 How you can help your employees with childcare gives details of organisations that can help employers to identify “qualifying childcare”.

An employee is only entitled to one exempt amount of £50 for each “qualifying week”. However, as the exemption applies only to vouchers up to a value of £50 in respect of a tax week (not that are provided in a tax week), vouchers do not have to be provided weekly. For example, if they are provided monthly, say 4 or 5 each month, in respect of the qualifying weeks in that tax month, it is only necessary for the employer to maintain a record of the weeks in respect of which they are provided.

The £50 limit applies even if childcare vouchers are provided for more than one child. However, it is permitted for two people to enjoy the exempt amount for the same child.

The £50 relief is not available for any qualifying week for which the similar relief for childcare contracted by the employer applies. An employee cannot have £50 relief on childcare vouchers and £50 relief on employer-contracted childcare for the same week.

Liabilities for tax and Class 1 NICs on the provision of childcare vouchers apply both to employees and to lower-paid employees, i.e. employees with an earnings rate of less than £8,500. Therefore, if the childcare voucher provision exceeds £50 in respect of a qualifying week, the excess is reported for tax purposes, at the end of the tax year, in section C Vouchers or credit tokens on form P11D or in section B Vouchers and credit cards on form P9D, as appropriate.

It is important to note that the excess is liable for Class 1 NICs and must, therefore, be added to the employee’s gross pay, for NICs purposes only, in the earnings period in which the vouchers are provided. The NICs liabilities cannot be handled at the year end.

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