TT58: Employer Contracted Child-Care

December 22, 2004

An easing of the tax burden for parents
From April 2005, employers can pay for child-care of up to £50 per person per week without the employee being liable for income tax and National Insurance Contributions. However, there are two conditions that must be met:

  1. The contract must be with a Registered child-carer.
  2. The facility must be made available to all eligible staff i.e. those bearing child-care costs for children under sixteen years of age.

…and that could mean Mum and Dad
Although there is only one amount of £50 available per ‘claimant’, no matter how many children there may be, the relief is not restricted to mothers. Therefore a mother and father of one or more children could each get £50 worth of child-care, even from the same employer.
An end to the crèche restriction
At present only crèche facilities provided by the employer are eligible for relief, thus many people are paying for all of their child-care costs out of taxed income. But from April 2005 this restriction ends, so a husband and wife working for the same employer could each effectively get £2,500 tax-free under this arrangement if the employer pays the first £100 per week directly to the child-carer.
Both employer and employee can benefit
If an employee sacrifices an amount of salary equivalent to the child-care contribution made by the employer, the following savings could be made:

Potential employer saving:

£2,500 x 12.8% x 70% (Post CT) = £224 per annum per claimant.

Potential employee saving:

Lower rate: £2,500 x (22% + 11%) = £825 p.a.
Higher rate: £2,500 x (40% + 1%) = £1,025 p.a.

(NIC assumptions are that a higher-rate payer has only a 1% exposure to employees NIC on additional earnings whereas a lower-rate tax payer has an exposure of 11%)

Barnes Roffe Topical Tips

  • Look carefully at all options to provide flexible benefits that could save you and your staff tax and National Insurance
  • Take care to revise contracts of employment to reflect the new arrangements, as failure to do so could leave you open to a demand from the Inland Revenue for PAYE and National Insurance on any salary reduction.

Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.

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