TT46: Reducing Childcare Costs

December 23, 2003

A mismatch in the rules
This issue of Topical Tips focuses on a mismatch between the income tax and National Insurance contributions (“NICs”) rules in respect of the benefit in kind that arises if an employee receives employer provided childcare support. (We have recently been able to negotiate refunds of NICs for clients who, understandably, were unaware of the manner in which the legislation for income tax and NICs differs.)
When is a crèche not a crèche?
When it’s not on the premises! For income tax purposes, there is a restricted tax exemption for childcare costs borne by an employer. The exemption is basically aimed at crèche facilities provided at the employer’s premises.

Although it is theoretically possible for the employer to provide exempt facilities away from the normal business premises (if the employer is responsible for financing and managing the provision of the childcare) usually the rigours of the what qualifies as tax exempt childcare facilities are not satisfied, so a taxable benefit in kind arises.
And if tax is due, aren’t NICs due too?
If the income tax exemption were available, then there would clearly be no liability to NICs. It is often thought that the converse automatically applies i.e. if the childcare facilities are not exempt income tax, Class 1A NICs will be due under the normal rules concerning benefits in kind.

This is not the case.

There is an exemption from NICs, which is much wider than the equivalent income tax exemption. Generally, any childcare costs in respect of a child under 16 years of age are exempt Class 1A NICs. Thus the costs of, say, a nanny who carries out her duties at the employee’s home will not be exempt income tax but will escape Class 1A NICs, and will not attract any employee’s NICs.
A word of caution
The contract for the child carer’s services must properly be between the employer and the carer. If that contract was between the employee and the carer, the payment of the employee’s “pecuniary liability” would be liable to tax under socalled first principles (i.e. as earnings rather than as a benefit in kind) and Class 1 NICs would be due by both the employer and the employee.

Barnes Roffe Topical Tips

  • A tax free benefit might possibly be payable to certain employees and directors.
  • Irrespective of the income tax position, National Insurance efficient childcare arrangements can easily be put in place for employees and directors.
  • Ensure the contractual obligation is with the employer rather than the employee.

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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