Nichola Ross Martin's Tax Consultancy

Employer provided childcare and childcare vouchers

At a glance

Three types of employer supported childcare are exempt from Income Tax and National Insurance contributions (NICs).

• Workplace nurseries
• Other childcare
• Childcare voucherss

Employers have to carry out an assessment of the employee’s earnings to work out the exempt amount for employees who join schemes on or after 6 April 2011. 

Workplace nurseries

• Places allocated to the children of employees in workplace nurseries are completely exempt from tax and NICs if they meet certain conditions.
• This exemption also covers another employer’s staff who work on the employer’s premises and use its childcare facility. 
• See Workplace nurseries

Directly contracted childcare (also known as other childcare) and Childcare vouchers

Two new measures were introduced in the 2011 Finance Act that affect employer childcare schemes from 6 April 2011: 

1. A reduction in childcare relief for higher earners.
2. Childcare vouchers and other childcare: changes affecting salary sacrifice and national minimum wage.

Reduction in childcare relief for higher earners 

The first £55 per week applies for both childcare vouchers and directly-contracted childcare irrespective of the earned income of the person in receipt of employer-supported childcare. 

For those joining schemes on or after 6 April 2011, the level of the tax exemptions will be limited as follows:

• for employees assessed as basic rate taxpayers, £55 per week;
• for employees assessed as higher rate taxpayers, £28 per week;
• for employees assessed as additional rate taxpayers, £22 per week.

The limits are determined by a basic earnings assessment carried out by the employer, based on the taxable employment income for that employment only after deduction personal allowances.

It will not take into account any further employments or other sources of taxable income that might otherwise affect the marginal rate of tax paid by an individual employee. 

Where an employer contracts directly with a commercial nursery or child minder to provide childcare:

• If an employee joined a scheme on or before 5 April 2011, the first £55 per week of the cost of providing the benefit will be exempt from tax and NICs.
•  For employees who join a scheme on or after 6 April 2011 go to www.hmrc.gov.uk/thelibrary/employer-qa.pdf

Childcare vouchers

Where an employer provides childcare vouchers which for employees to use to pay for qualifying childcare.

• If an employee joined a scheme on or before 5 April 2011 the first £55 per week will be exempt from tax and NICs.
• For employees who join a scheme on or after 6 April 2011 go to www.hmrc.gov.uk/thelibrary/employer-qa.pdf 

General conditions for employer supported childcare

The following conditions relate to all childcare support provided by an employer: 

• Available to all staff — the childcare support should be offered in a scheme in which all employees are eligible to participate. The ‘available to all’ condition for childcare vouchers and directly contracted childcare is not breached where workers who earn on or near the National Minimum Wage (NMW) are unable to join an employer’s scheme due to the requirement to safeguard payment of the NMW in full. However, childcare support for workplace nurseries must be offered in a scheme in which all employees are eligible to participate, including workers with earnings at or near the NMW.

• Qualifying child — a child qualifies up to 1 September following their 15th birthday, or 1 September following their 16th birthday, if they are disabled. The child must be the child or stepchild of the employee or a child for whom the employee has parental responsibility.

• Registered or approved childcare only — to qualify for the exemption, any childcare provided by an employer or for which childcare vouchers are used must be registered or approved. 

Childcare vouchers and other childcare: changes affecting salary sacrifice and national minimum wage 

One of the existing conditions for childcare tax relief is that the employer’s scheme has to be open to the employer’s employees generally or generally to those at a particular location. 

The 2011 Finance Act amenda the qualifying conditions so that employees with earnings at or near the NMW can be excluded from employer-supported childcare schemes because of the alternative availability of the childcare element of the Working Tax Credit. 

• In a salary sacrifice arrangement or flexible working scheme an employee foregoes part of their salary in order to gain a benefit.
• Many employers do not allow employees who cannot participate in salary sacrifice or flexible remuneration arrangements for legal reasons (e.g. employees with employment earnings at or near the National Minimum Wage (NMW) to become members of their
• childcare scheme).
• Employers have the option of paying the benefit on top of salary (that is, a ‘salary plus’  arrangement which would not disturb those earning at or near NMW levels).
• In most cases, individuals with earnings at or near the NMW will have financial support for childcare available in the form of the childcare element of the Working Tax Credit.
• From April 2011 this offers lower income families up to 70 per cent of their childcare costs to a maximum limit of £175 per week for one child, and £300 per week for families with more than one child.
• The amendment is being made for the tax year 2005-06 and subsequent tax years in order to remove any outstanding tax liability for schemes that did not meet all of the conditions set out in existing legislation.

Small print 

Amendments to Section 270A ITEPA 2003 Limited exemption for qualifying childcare vouchers, section 318 + ITEPA 2003 Childcare exemptions, introduction of  new 318AA Meaning of “employment income amount” and “required time”.