Tax relief for childcare costs - Do small businesses have a choice?

  • by Carole Jordan
  • 03 Apr, 2017
Tax relief for childcare costs businesheads accountants brighton

There are currently two schemes in operation which provide a contribution to your child care costs. The decision to use them could be complex for owners of incorporated businesses. Here’s an overview to help you.

Childcare vouchers

For some time, an employer has been able to provide their staff with tax free child care through what is generically known as ‘child care vouchers’. This is because, often, the employer will buy vouchers through a third party that the child care provider will accept as payment for the service. 

The alternative is that the company contracts directly with the childcare provider and that is cheaper and sometimes easier for an owner managed company. 

This method gives the employee a maximum of £243 per month tax and national insurance free for basic rate payers and £124 for those in the higher rate. Childcare is a business expense for the employer and so attracts relief against company tax relief. The excess above the tax free amounts will be taxed on the employee as a taxable benefit. 

Many business owners with a limited company have taken advantage of this scheme. If you wish to do so you will need to set this up in your business before April 2018. 

Because ‘childcare vouchers’ are only available to employees, the self employed have not been able to take advantage of this.

Tax free childcare

This is a new scheme designed to replace childcare vouchers over time and is available to everyone who is eligible (see below). The new scheme is being rolled out from 28th April, initially available for children aged up to 2 years but available for children up to 12 by the end of this year. 

Parents pay into a NS&I tax free childcare account, and for every 80p you pay in the government pay in a further 20p, up to a maximum of £2,000 per child. You can withdraw the money from the account if you need to. 

Disabled children will receive £4,000 per annum up to the age of 17. 

In order to qualify, both parents need to earn more than £120 per week and neither can earn more than £100k per annum. There will be a dispensation for self employed start ups who are not reaching these levels, details still to be released.

Making the right decision for your business

If you own a business and work in the company the additional benefit of the ‘childcare voucher scheme’ is that you will benefit by the payments to the childcare provider being tax deductible against your company income. Currently saving you 19% tax as well as the tax you would otherwise pay on the salary you would need to take to pay your child care costs. It is likely this scheme will continue to be more financially beneficial for you. 

However, the amount free of income tax is only £243 or £124 per month and so if your costs are higher, using the new scheme may be better for you as the maximum is an average of £833.33 per month.   It also seems to be less of an administrative burden and keeps your personal life separate from your business reducing the complexity of your tax situation.

If your childcare costs exceed the limits of the childcare voucher scheme we recommend you do the calculations to see which is financially more beneficial for you. 

Start with the government calculator and contact your accountant for further help connected to your business. 

This article was written by Carole Jordan FCCA, MD, Business Consultant and Tax Advisor at BusinessHeads Limited – Consultants and Accountants in Brighton & Hove UK.

All details above were correct at the time of publishing - for more up to date information please   get in touch .

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