On 3 December 2009, the Government announced changes to the tax and NIC exemptions for employer supported childcare, which have affected the level of benefit available to some working parents who have joined a childcare voucher scheme after 6 April 2011.
Why did the rules change?
Previously, higher earning scheme members received a greater tax saving than those on basic rate tax. The changes even out the amount of tax saving available for all employees, regardless of the rate of tax they pay, making the benefit more equitable for all.
Who has been affected by the changes?
The changes only affected employees who joined a childcare voucher scheme on or after 6 April 2011. Pre-existing scheme members are unaffected and have retained their existing level of tax savings until such time as they leave the scheme.
What do we need to do differently since 6 April 2011?
You will be required to carry out a Basic Earnings Assessment (can be found further down the page) for any employee joining your childcare voucher scheme. This assessment must be based on the expected earnings for the coming year, not the previous year’s earnings. It is acceptable to use the tax code as at 6 April of the relevant tax year. This assessment will fix the maximum value of childcare vouchers available to that individual for the rest of that tax year.
You do not need to carry out a basic earnings assessment for pre-existing scheme members.
When do we carry out the basic earnings assessment?
You are required to carry out a Basic Earnings Assessment (can be found further down the page) for any employee who has joined your childcare voucher scheme on or after 6 April 2011, at the point when they first joined the scheme, then at the beginning of each tax year thereafter. This assessment will fix the maximum value of childcare vouchers available to that individual for the rest of that tax year.
What records do we need to keep?
You must keep a record of the Basic Earnings Assessment (can be found further down the page) calculation, for audit purposes.
What are the childcare voucher amount limits?
Employees who have joined your childcare voucher scheme since 6 April 2011, will received a Basic Earnings Assessment, so will be subject to the following limits:
Pre-existing scheme members can continue to claim up to £55 per week (£243 per month / £2,915 per year) of childcare vouchers.
Will employees need to complete new Amendment to Contract (ATC) forms?
No. Pre-existing scheme members did not need to do anything to continue receiving childcare vouchers exactly as they were before. Employees who have joined your scheme since 6 April 2011 have completed an ATC in the normal way, and have been subject to the limits detailed above, as determined by your Basic Earnings Assessment. For the avoidance of doubt, employees must have registered to join the scheme, and submitted their ATCs on before 5 April 2011 for the previous limits to apply.
Can pre-existing scheme members still make changes to their voucher values?
Yes. Pre-existing scheme members can apply for changes to their voucher value by completing a Contract Variation in the normal way. This will not affect their tax exemption entitlement.
Can pre-existing scheme members opt in and out of the scheme?
Yes. Providing the cessation does not exceed 12 months, existing scheme members can take ‘breaks’ from the scheme, therefore not having to be treated as a new joiner when their childcare voucher credits resume.
What happens when an employee leaves to join a new employer’s childcare voucher scheme?
The employee will be treated as a new joiner in their new employer’s childcare voucher scheme and will be subject to a Basic Earnings Assessment (can be found further down the page) in the normal way.
What if we change our business name due to a take-over or merger?
In this situation, employees who were already participating in your childcare voucher scheme will not be regarded as new joiners, and will retain existing levels of tax relief.
What happens if we change childcare voucher provider?
Changing childcare voucher provider will not affect employees’ status as pre-existing scheme members.
What is a Basic Earnings Assessment?
You are required to complete a Basic Earnings Assessment at the beginning of each tax year for all scheme members who have joined since 5 April 2011. This will determine whether they are basic, higher or additoinal rate tax payers for the purpose of calculating childcare voucher entitlements.
The basic earnings assessment should include:
- Basic pay as stated in the employee’s contract of employment
- Contractual or guaranteed bonuses
- Contractual Commission
- London weighting or other regional allowances
- Guaranteed overtime payments
- Taxable benefits
- Shift allowances
- Skills allowance
- Retention and recruitment allowances
- Market rate supplements
- Cash equivalent of any taxable benefits (e.g company car)
The calculation should exclude:
- An amount equivalent to the employees personal allowance
- Performance related or discretional bonuses
- Overtime payments
- Contributions to occupational pension schemes
- Payroll giving donations
- Removal expenses
- Expenses payments
For more detailed information, please call our Helpdesk on 0800 458 7929 or visit http://www.hmrc.gov.uk/thelibrary/employer-qa.pdf