Employer-Supported Childcare – Tax Relief

HMRC have updated their guidance on Employer-Supported Childcare to outline their interpretation of sections 35 and 36 and Schedule 8 of the Finance Act 2011 which came into force in July 2011.  The changes affect the tax reliefs available for Employer-Supported Childcare and are effective from 1 April 2011. 

The purpose of the change is to even out the amount of income tax savings available to all employees joining schemes regardless of the income tax rate that the individual pays.  The essential change is that anyone who joins an Employer-Supported Childcare scheme from 6 April 2011 will only get income tax relief at the basic rate.

However, if an employee was already a member of their employer’s scheme before 6th April 2011 and the employee’s circumstances have not changed, such employees will not be affected and will retain their current level of tax relief until:

  • they leave their current employment (but excluding a change of employer which is outwith the employee’s control, such as a TUPE transfer); or
  • they leave the employer’s childcare scheme; or
  • they receive no employer-supported childcare for a continuous period exceeding 52 weeks; or
  • their child no longer receives qualifying childcare; or
  • they no longer have a child qualifying for the tax relief, for example, they are older than the upper age    limit specified.

Under the old rules, employer-supported childcare is tax-free for the first £55 per week at the employee’s marginal rate of tax.  Thus a 50% taxpayer would get relief at 50%.

The new rules provide for restrictions which target employees who pay income tax at 40% or 50%.  The effect of the restrictions will be to ensure that higher-paid employees do not receive more from the tax exemption than basic rate tax payers.  To achieve this, the weekly limits on the tax-exempt provision of childcare schemes will be:

– £55 for 20% taxpayers;

– £28 for 40% taxpayers; and

– £22 for 50% taxpayers.

Thus, a basic rate employee receiving vouchers worth £55 is entitled to tax relief amounting to £11.  The lower weekly limits for 40% and 50% taxpayers ensure that they also have tax relief of approximately £11 (40% of £28 = £11.20, 50% of £22 = £11).

Jack Boyle
Employment Solicitor

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