How are Class 1 NICs liabilities on childcare vouchers determined?

The tax and NICs exemptions for the provision of childcare vouchers took effect from 6 April 2005. In principle, no liability for tax or Class 1 NICs arises where childcare vouchers with a value of not more than £;55 per week are provided for employees. Where the weekly limit is exceeded,

• the tax liability is reported on form P9D or P11D, as appropriate, after the end of the tax year
  
  
• the NICs liability is checked in each earnings period and, if a liability arises, the amount is added to the employee's gross pay for that period (for NICs purposes only).

The rules for determining the NICs liability for childcare vouchers, as set out in the Social Security (Contributions) Regulations 2001, are significantly different from the rules for income tax. As with all non-cash vouchers, any NICs liability on childcare vouchers is for Class 1 NICs, not Class 1A NICs. Both employee and employer must pay Class 1 NICs if the weekly limit is exceeded. Any liabilities are determined for each earnings period.

The statutory method of calculating the NICs liability in an earnings period is rather complex but HMRC is happy for employers to use a simplified method if vouchers are provided in regular monthly instalments throughout the tax year.

There are some significant differences between the tax rules and the NICs rules, in particular

• the way in which vouchers are valued for tax and NICs purposes,
  
  
• how "voucher administration costs" are excluded from the calculations, and
  
  
• the "exempt amount" and how it is applied.

In order to understand the differences, it is important to consider first the way in which childcare vouchers are valued for tax purposes.

The taxable value of childcare vouchers for income tax purposes

The value on which the tax charge for non-cash vouchers is usually based is the cost incurred by the employer in providing them - not necessarily their face value. For example, employers can obtain Marks & Spencer gift vouchers with either a 2½% or 5% discount depending on the order value. It may, therefore, cost the employer £;47.50 to provide a £;50 gift voucher. Unless there are any other acquisition costs, the reportable benefit for such a voucher would be £;47.50.

A different rule applies to childcare vouchers. As most childcare vouchers provided for employees under salary sacrifice schemes are provided by specialist suppliers, there are normally additional charges to be paid on top of the voucher cost. For example, the management fee on a £;55 childcare voucher could be £;5.50. If the cost incurred by the employer, i.e. £;60.50, were used to determine the reportable benefit, only £;55 would be tax free under the childcare voucher rules from 6 April 2005, and the employer would have to report the £;5.50 excess.

To prevent such additional charges counting towards the £;50 exemption, the tax rules allow some or all of the "voucher administration costs" to be excluded from the calculation. The amount that may be excluded is the difference between

• the expense incurred by the employer in providing the voucher, and
• the "face value" of the voucher.

The "face value" of a childcare voucher is the value printed on the voucher or the value of the childcare that may be obtained using it.

• Example: If it costs the employer £;55 plus £;5.50 administration charges to provide a voucher with a face value of £;55, all of the £;5.50 administration charges are excluded and the exempt amount is not exceeded.
  
  Example: If the employer obtains a £;55 childcare voucher for £;52.50, plus £;5.50 administration charges, the amount to be excluded is limited to £;3, i.e. the difference between £;58, the cost to the employer, and £;55, the voucher's face value. The £;55 exempt amount is therefore still used up in full.

The "exempt amount" for income tax purposes

The "exempt amount" for income tax purposes is £;55 for each qualifying week in the tax year. A "qualifying week" is a tax week in respect of which a qualifying childcare voucher is received by the employee. A "qualifying childcare voucher" is a voucher for which the statutory conditions for tax exemption are met, i.e. the age of the child, whether the employee receiving the voucher has parental responsibility for the child, whether or not the childcare for which the voucher is used is approved or registered, and whether childcare vouchers are provided under a scheme that is generally available to all employees.

For P9D and P11D reporting purposes, employers must, for each employee, keep a record of each week during the year for which vouchers were provided that exceeded the exempt amount, i.e. £;55 per week, or that did not meet the qualifying conditions. So, for example, if vouchers to the value of £;100 are provided for a single week, the extra £;45 is recorded and reported at the year end. However, if an employee receives, say, four £;55 vouchers at one time but they relate to four separate weeks, they all qualify for the exemption.

There is no "averaging" provision in the tax legislation.

Example: If vouchers to the value of £;200 are provided for each of the 6 weeks summer holidays and no vouchers are provided for the rest of the year, the reportable benefit at the year end is £;870, i.e. 6 weeks × £;145. The exempt amount is £;55 per week, not £;2,915 per annum.

The "chargeable expense" of childcare vouchers for Class 1 NICs purposes

Now we can consider the quite different way in which any NICs liabilities for childcare vouchers are determined. The principle here is that a childcare voucher is treated as earnings for Class 1 NICs to the extent that the "chargeable expense" exceeds the "exempt amount" of the voucher.

The "chargeable expense" of a childcare voucher is not the same as its value for tax purposes. Rather, the chargeable expense is the total cost incurred by the employer in providing the voucher, including any voucher administration charges (as already defined for tax purposes).

Example: If it costs the employer £;200 plus £;20 administration charges to provide vouchers with a face value of £;200, the chargeable expense is £;220.

Example: If the employer obtains vouchers with a face value of £;200 for £;190, plus £;20 administration charges, the chargeable expense is £;210.

The "exempt amount" for Class 1 NICs purposes

The definition of the "exempt amount" for NICs purposes differs from that for income tax in two significant respects.

1. The exempt amount for a week is £;55, plus the voucher administration charges (as already defined for tax purposes).
   
   
2. The exempt amount that is to be compared with the chargeable expense of the vouchers provided in an earnings period is
   
   
   • the exempt amount for one week, including the administration charges, multiplied by
     
     
   • the number of qualifying weeks
     
     
     • for which the employee has been employed by the employer in the current tax year, and
       
       
     • for which no other qualifying voucher has been provided by the employer.

This arrangement recognises that, unlike tax liabilities, NICs liabilities have to be assessed for each earnings period and, where a certain value of vouchers provided in one earnings period relates to earlier earnings periods, it would be unreasonable to treat them all as having been provided in that earnings period. The procedure provides a cumulative method of determining the NICs liabilities.

• Example: A weekly-paid employee is provided with childcare vouchers with a face value of £;220 in tax week four (i.e. 4 weeks @ £;55). The employer paid £;242 (i.e. £;220 + £;22) for them, including administration charges. No other vouchers were provided in the first three weeks of the tax year. The chargeable expense for the earnings period is £;242. The exempt amount is also £;242, i.e. £;60.50 × 4 weeks. As the chargeable expense does not exceed the exempt amount, there is no NICs liability for the earnings period.
  
  Example: A weekly-paid employee is provided with childcare vouchers with a face value of £;220 in tax week one, for use during the first four weeks of the tax year. The employer paid £;242 for them, including administration charges, so the chargeable expense for the earnings period is £;242. However, the exempt amount in this situation is £;60.50 (i.e. £;55 + £;5.50) as the number of qualifying weeks is 1. The chargeable expense exceeds the exempt amount by £;181.50, so there is a liability for Class 1 NICs on £;181.50 for the earnings period.

The simplified method

The rather complex statutory procedures can be avoided if vouchers are provided in regular weekly or monthly instalments throughout the tax year. For the purposes of vouchers provided monthly, HMRC instructs that the exempt amount for one month is £;243 (i.e. £;55 × 53 ÷ 12, rounded up), plus administration charges.

• Example: A monthly-paid employee is provided with childcare vouchers with a face value of £;243 each month. The employer paid £;267.30 for them, including administration charges of £;24.30, so the chargeable expense for the earnings period is £;267.30. The exempt amount is also £;267.30. As the chargeable expense does not exceed the exempt amount, there is no NICs liability for the earnings period, or for any of the earnings period during the tax year.

If the statutory calculation method had been used in this example, there would have been an NICs liability in several of the months during the year. This is because the statutory calculation looks at the number of completed tax weeks up to the end of each earnings period.

• Example: During the 2006/07 tax year, a monthly-paid employee is provided with childcare vouchers with a face value of £;243 each month. The employer pays £;267.30 for them, including administration charges (i.e. £;243 per month, plus £;24.30). The exempt amount is £;60.50 per week (i.e. £;55 plus £;5.50). The monthly salary is paid on the last banking day of each month.
  
  
  April: On 28 April the employee has completed 3 tax weeks (week 3 ends on 26 April). The chargeable expense is £;267.30. The exempt amount is £;181.50 (i.e. £;60.50 × 3 weeks). There is an NICs liability on £;85.80.
  
  May: On 31 May the employee has completed 8 tax weeks (week 8 ends on 31 May). The chargeable expense is £;267.30. The exempt amount is £;302.50 (i.e. £;60.50 × (8 weeks - 3 weeks)). There is no NICs liability.
  
  June: On 30 June the employee has completed 12 tax weeks (week 12 ends on 28 June). The chargeable expense is £;267.30. The exempt amount is £;242 (i.e. £;60.50 × (12 weeks - 8 weeks). There is an NICs liability on £;25.30.
  
  

The following Table shows the results of the statutory calculation for the full 2006/07 tax year.

The simplified method is not provided for in legislation but is a sensible and practical concession by HMRC. The £;243 figure for monthly-paid employees is given on page 10 of the E18 Help Book (2006, second edition). It would seem appropriate, therefore, that the simplified method should also be used for other earnings periods, e.g. fortnightly, four-weekly, where vouchers are provided regularly in fortnightly or four-weekly instalments. The fortnightly exempt amount would be £;110 plus administration charges, the four-weekly exempt amount would be £;220 plus administration charges.

The simplified method is also suitable if the value of the vouchers provided varies but never exceeds the relevant exempt amount in any earnings period. There will never be any NICs liability in that situation. However, the statutory calculation procedure must be used if

• the value of the vouchers provided exceeds the exempt amount in any earnings period(s), or
  
  
• the vouchers are provided in instalments that differ from the employee's earnings period.

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Further Information:
www.hmrc.gov.uk/manuals/nimmanual/nim02445.htm

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