What are the rules for tax and NICs relief on employer-contracted childcare?
The statutory provisions affecting the tax liabilities on the provision of childcare are set out in sections 270A and 318-318D of the Income Tax (Earnings and Pensions) Act 2003. The special Class 1 NICs rules covering the provision of childcare vouchers are to be found in Schedule 3 of the Social Security (Contributions) Regulations 2001.
The legislation draws a distinction between three different ways in which childcare benefits may be provided, namely
- childcare provided by the employer on the employer's premises
- childcare provided by the employer through external childcare providers
- childcare vouchers for employees to redeem at nurseries of their choice.
Each of these provisions has it own, somewhat complex, statutory rules. This article will consider the rules for the second of these ways of providing childcare, i.e. where the employer provides childcare by contracting with external childcare providers, e.g.
- registered child-minders, nurseries and play schemes
- out-of-hours clubs on school premises run by a school or local authority
- childcare schemes run by approved providers, for example, an out-of-school hours scheme or a provider approved under a Ministry of Defence accreditation scheme
- approved foster carers (the care must be for a child who is not the foster carer's foster child).
Unlike the provision of workplace childcare, the tax and NICs relief on employer-contracted childcare is limited to a maximum of £55 of benefit provided in a "qualifying week". If the benefit exceeds £55 per week in value, a liability to tax and Class 1A NICs arises on the excess value. However, all of the following conditions must be met if the limited relief is to apply:
- the child must be a "child" or "stepchild" of the employee, resident with the employee and maintained wholly or partly at the employee's expense
- the employee must have parental responsibility for the child
- the "childcare" provided must be "qualifying childcare"
- the scheme must be open to the scheme employer's employees generally (even if there is a waiting list).
Definitions
qualifying week - a tax week in which childcare is provided for a child in circumstances in which all of the conditions are met.
tax week - each successive 7-day period starting on 6 April, just as for PAYE, but the last day of the tax year, or the last two days in a tax year that ends in a leap year, are also treated as a tax week if all of the conditions are met.
child - a person is a "child" until the last day of the week in which falls the 1st September following the child's fifteenth birthday (or sixteenth birthday if the child is disabled).
disabled - a child is "disabled" if
- a disability living allowance is payable in respect of the child, or is no longer payable solely because the child is a patient in hospital, or
- the child is registered blind or ceased to be registered in the previous 28 weeks.
childcare - any form of care or supervised activity that is not provided in the course of the child's compulsory education.
qualifying childcare - childcare that
- meets all of the statutory conditions for registration and approval of care in each country of the UK, or
- is provided by a school, or on school premises by a local authority.
However, childcare does not qualify if it is provided
- by the employee's partner, or
- by a relative of the child, wholly or mainly in the child's home or the home of a person having parental responsibility.
The requirement for the childcare contracted by the employer to be "qualifying childcare" places a heavy burden on the employer if the conditions for tax exemption are to be met. In whichever country of the UK the childcare is provided, it must be registered or approved under the local legislation and it must not be of a kind that is excluded. If the care is not "qualifying childcare", a liability to tax and Class 1A NICs arises on the full value, not just on the excess.
It is very difficult for employers to determine whether a particular type of childcare qualifies, especially employers that provide childcare throughout the UK - and a mistake could be costly. Employer's Help Book E18 How you can help your employees with childcare gives details of organisations that can help employers to identify "qualifying childcare".
The £55 limit applies even if childcare is provided for more than one child. However, it is permitted for two people to enjoy the exempt amount for the same child.
The tax and NICs relief for a particular qualifying week only applies to childcare that is provided in that week. If, for example, a nursery requires a retainer to be paid for a week when the child is on holiday and the employer pays the retainer, that payment does not enjoy the £55 relief because no childcare has been provided.
The £55 relief is not available for any qualifying week for which the similar relief for childcare vouchers applies. An employee cannot have £55 relief on employer-contracted childcare and £55 relief on childcare vouchers for the same week.
Liabilities for tax and Class 1A NICs on the provision of childcare apply to employees but not to lower-paid employees, i.e. employees with an earnings rate of less than £8,500. Therefore, if the childcare provision for a lower-paid employee exceeds £55 in a qualifying week, the excess is not reported on form P9D.
The relief is only available where the employer contracts for the childcare and the conditions are met. If the employee obtains the childcare and the employer
- pays the bill direct to the provider, the payment is reported in Section B of form P11D or Section A(2) of form P9D
- reimburses the employee's costs, the payment is liable for PAYE tax and NICs through the payroll.
...UK Payroll News - Latest
The UK Payroll News is sponsored by HRD & Payroll Solutions
Discuss this news item in the PayPerShop Forum
|
For Payroll and Human Resource Professionals
