Children can be taxing!

27th February 2018

There is nothing governments enjoy more than acronyms. In recent years we've had RTI (Real Time Information for payroll) and AE (Auto Enrolment for pensions) and in the next few months GDPR (the General Data Protection Regulations, themselves an update of the DPA - Data Protection Act) will come in to force before MTD (Making Tax Digital) changes the landscape for accountants and company bookkeepers in April next year.

But before all that TFC (Tax Free Childcare) will soon supersede Childcare Vouchers. Whilst TFC has been available since April 2017, Childcare Vouchers have also been available and depending on your circumstances one may be more beneficial than the other. From 6th April, 2018 however Childcare Vouchers will no longer be available to new entrants - if you are already in a scheme before this date you can continue to use it, however if you move company's then you can't move scheme.

With this in mind it's worth considering your personal position to ensure that you are not losing out if Childcare Vouchers are available to you. It's also worth remembering that you can benefit from free childcare (up to 600 hours for 3 and 4 year olds in Scotland and 570 hour in England) and childcare vouchers at the same time. It is also worth noting that childcare vouchers can be used for care for children up to 15 years old. If in doubt you should consider signing up to childcare vouchers before 6th April (even if you only get £1 in vouchers) and speaking with a professional adviser thereafter to review your personal position. It’s worth noting that you need to continue to make monthly payments under salary sacrifice and that some providers are imposing monthly minimum contributions.

Under TFC the government will top up £2 for every £8 you pay in to your online TFC account. This is capped every 3 months at £500 of tops ups for each child (i.e. you are limited to contributing £2,000 per child every 3 months). There are some qualifying criteria however:

  • Parents must earn £120 / week
  • Parents can't earn more than £100,000
  • Parents need to reconfirm their eligibility every 3 months with HMRC
  • If there are 2 parents in the household then they both must be working
  • You cannot join if claiming Child Tax Credits, Universal credit or benefiting from tax & NIC savings from Childcare Vouchers

Childcare vouchers normally operate under salary sacrifice. Using the figures above, if you sacrificed £10 salary for Childcare Vouchers then your “taxable” pay would decrease by £10. i.e. you wouldn’t have PAYE deducted on the £10 (i.e. saving you £2 – as above if you are a basic rate tax payer) and you also wouldn’t have any NIC’s deducted either (with the employers enjoying employer NIC savings to offset against the cost of running the scheme). Childcare vouchers must be made available to all members of staff and there are limits as to how much you can sacrifice – £243 / month for basic rate tax payers, £124 for higher rate and £110 for additional rate. There is also a requirement that your gross taxable wage (after salary sacrifice) is not less than the minimum wage limit.

With all these issues and criteria it can be difficult to determine which option is best for you and your family. We would recommend that you consider the following issues when comparing the two schemes:

  • Eligibility
  • Income
  • Cost of your childcare
  • Age of your children (and if you plan on having any more!)
  • Effects on other benefits

As noted above, normally childcare vouchers are taken by salary sacrifice but companies can offer it as an "Addition to Salary" scheme (and even offer different schemes to different employees). The benefit of the addition to salary scheme is that the payments of up to £243 / month for basic rate, £124 for higher rate and £110 for additional rate tax payers are not taxable benefits. For small / close companies this is particularly important as the company can therefore pay a director childcare vouchers (or pay the childcare provider directly - dependant on certain criteria) £243 / month without there being any benefit in kind.

Let’s look at an example where you have a husband and wife who are both directors in their company with children in childcare (remember that this can include: nursery, breakfast clubs and after schools clubs, nannies, child minders, sports clubs, holiday clubs and summer camps, tours as long as they are covered by Ofsted, or the equivalent governing body). In this instance the company could make a total contribution of £5,832 per annum (£243 / month for each director) and after deducting corporation tax the net cost to the company would be £4,723.

If these directors had maximised their basic rate band through tax planning then paying out additional dividends in order to receive £5,832 net would mean that the company would need to declare dividends of £8,640 (assuming 32.5% tax on dividends). The net cash-flow saving for the company is therefore £3,917 per annum and if the directors were remunerated by salary only then the savings would be even higher.

Another bonus is that under the addition to salary schemes you can make "catch up" payments for the current tax year. So even if you haven't signed up yet you can make catch up payments for the tax year to date!

These are the kind of small, simple things that can have a big impact on our clients’ lives and ensure that they are taking home more of what they earn. If your accountant hasn't raised this issue with you yet then what other reliefs are they potentially missing. Remember your accountant should SAVE not cost you money.

Our fees are an investment rather than a cost and the savings noted above would cover the annual compliance costs for most SME's. So why don't you treat yourself to some R&R and contact us today. If you would like to discuss this in more detail with a member of the team then please don’t hesitate to contact us.