How is your organisation going to be affected by changes to the tax system in regards to childcare? Expert Rebecca Benneyworth gives her advice.
Employers operating childcare voucher and similar schemes will have their work cut out after 5 April if new employees join the scheme. Changes brought forward to reduce the cost of the tax relief for higher paid staff mean that although the employer can still provide vouchers worth up to £55 per week to employees through the scheme, the limit on the tax free amount will vary for staff joining the scheme after 5 April 2011.
New staff who earn sufficient from that employment to be either higher rate or additional rate taxpayers will see a benefit reported on their P11D form at the end of the year to reflect the reduced tax free allowance.
The change affects employers operating two types of scheme:
- Childcare vouchers
- Directly contracted childcare
The change does not affect employers operating workplace nurseries. These continue to be a tax-free benefit without limit provided conditions are met.
Existing employees are not affected by the change. To meet the definition of existing employees, the individuals must have submitted an application to the employer on or before 5 April 2011, and be eligible to receive tax and NIC exemption on that date. This means that the child must be born or placed for adoption at 5 April 2011.
What employers must do
When an employee joins a scheme on or after 6 April 2011 the employer must carry out a Basic Earnings Assessment. This is to establish their marginal tax rate for these purposes, and is carried out when the employee joins the scheme and annually at the start of the tax year thereafter.
The basic earnings assessment is based on the information available at the time it is carried out, which is when the employee joins the scheme, and thereafter at the start of each tax year. Once carried out it remains unchanged for the balance of the tax year. The information used in the assessment is derived only from the current employment (irrespective of other employments held), and must include:
- Basic pay as per contract of employment (this employment only)
- Benefits in kind
- Contractual or guaranteed bonuses
- London weighting or other regional allowances
- Taxable benefits
- Shift allowances.
Performance-related pay and bonuses, and overtime are excluded.
The assessment is used to determine how much the tax free allowance is for the year (see the table below). The basic earnings assessment amount is compared to the higher and additional rate thresholds, adjusting for personal allowances if appropriate (although it is not clear how employers are supposed to do this in practice).
If the employees receive amounts in excess of the tax free amounts, the excess is to be included on the P11D for that year. For NIC purposes if the excess is provided as vouchers then the amount should be included in payroll and employer and employee NIC accounted for at the time the vouchers are provided. If the excess is directly contracted childcare NIC is Class 1A and reported on P11D and P11D(b) accordingly.
Beware sting in the tail
If in the interests of simplicity the employer decides to close the scheme to new entrants from 6 April 2011 to avoid these complications, the scheme is then no longer open to all employees and all current recipients of vouchers or directly contracted childcare will be taxable and NICable in full!
Rebecca Benneyworth is tax editor for AccountingWeb.co.uk and an expert lecturer on all things tax.
- This article first appeared on our sister site, AccountingWeb.co.uk