By Michelle Quince, Senior accountant at Hive Business

With childcare costs soaring, we are often asked whether anything can be done to help out with these costs.  The good news is that if you are an employee (even if you are Director in your own limited company), there is a way to partially fund these costs and save tax.

In normal circumstances paying anything on an employee’s behalf can cause all manner of headaches in the form of “Benefits In Kind” with additional tax due on the employee and additional national insurance due on the business.  However, when it comes to childcare, HMRC have been relatively kind and provided an exemption so long as you meet certain criteria.

Before I start there is one important piece of information to make clear.  In order to qualify for assistance with childcare you must be a basic-rate or higher-rate taxpayer who is an employee (unfortunately there is no assistance available for self-employed individuals).  For example, if you are a director of your own company, it is likely that your salary is set in the region of £7,200 per annum, with the remainder of your income is taken as dividends.  However, as dividends are not considered in the earnings assessment, you will therefore likely be considered a basic-rate taxpayer and eligible for the maximum £55 per week / £243 per month in tax relief (higher-rate taxpayers are unfortunately entitled to less).

Essentially there are two ways which a company can help to contribute towards your childcare costs without incurring additional tax and national insurance, one of which is better than the other:

Childcare voucher schemes

Childcare voucher schemes may already be familiar to those of you that run a practice and have employees who use schemes like “Kiddivouchers”.  However what you might not appreciate is that most schemes charge an admin cost meaning that although the company might pay £243 pm to the voucher company (for which it receives tax relief), it will probably only buy you around £223 pm of childcare.  It works by deducting the cost of the vouchers (£243pm) from your gross (pre-tax) wages which reduces the amount of tax and national insurance that would be payable.  However seeing as for most of you, we have recommended that you take a tax-efficient Directors’ salary of £600 or £670 per month it’s unlikely that you will be paying any tax or national insurance and therefore this isn’t the most beneficial method of helping you with your childcare.

Employer supported childcare

Alternatively, the company could pay for part of your childcare costs direct.  If your company pays £243pm direct to your childcare provider, then you save £243pm in cold hard cash and the company also receives tax relief on the amount paid.  So it’s win-win as there’s no silly admin charge that gets lost along the way!

In order to implement the employer funded childcare scheme the following conditions must be met:

• The childcare provider must have the relevant registrations and approvals;

• The scheme must be made available to all employees, but this can be a good thing if your partner is also a Director of the company as the £243pm allowance is available per employee;

• The childcare must be for employee’s for which they have parental responsibility;

• The contract for the childcare needs to be between “Your Company Ltd” and the childcare provider and you will need to write a letter to your provider to make that clear;

• The childcare provider must then invoice “Your Company Ltd” for childcare costs of £243pm.  Note – if the total cost of the childcare exceeds that amount then the balance will need to be invoiced to you personally.

If you want to discuss any element of this article further then please do not hesitate to contact us. Get in touch if you’d like to discuss your options with us or find out more about any of our services on 01872 300232 or email us at hello@hivebusiness.co.uk.