There are two ways you can pay for childcare costs via your limited company: through a direct agreement with a childcare scheme provider or through a voucher scheme. Both arrangements can be offset as a business expense and will be exempt from tax and national insurance up to a certain amount.
The allowable amount is available to both parents, so if you are a limited company director and your wife or husband is an employee of the company, then both of you can claim for childcare costs.
Voucher scheme or direct agreement?
Before looking at how the childcare voucher scheme works, we should point out that from 5th October 2018, no new applications to the scheme will be accepted. Instead, you will need to apply to a new ‘Tax-Free Childcare’ scheme after this date (see later in this article for details).
If you are already a member you can still use the vouchers for as long as your employer runs the scheme and you remain an employee. Vouchers are paid to employees and are used to pay for childcare. The childcare provider then claims back the fees and an admin fee from the company who issues the vouchers.
With a direct agreement, the limited company pays a provider for childcare costs on behalf of the employee. The amount the company pays is set out in an agreement between the employer and employee.
Childcare and tax relief
So how much childcare can you provide before exceeding limits set by HMRC?
There are a number of factors to consider, the main one being the date when the employee first joined the company’s childcare scheme.
If you joined before 6 April 2011, the company can pay £55 per week or £243 a month, which is exempt from tax or national insurance contributions.
For anyone joining after that date, relief on the amount paid will be based on the employee’s basic earnings (see below). Restrictions apply for higher earners.
How to qualify for a childcare scheme
To qualify for the childcare scheme, the following conditions must be met:
- You must have parental responsibility for the child you are claiming childcare for.
- Only registered childcare providers are approved under the scheme. These include nurseries, crèche facilities, registered childminders, play schemes and out-of-hours clubs run by a school or local authority.
- If the provider of childcare is a relative, they will have to be registered and run an approved business which offers childcare to other children.
- Payments made outside the childcare scheme, won’t qualify for tax and NI exemptions. This includes cash paid to employees to cover childcare costs and invoices issued in the employee’s name but paid for by the company.
- The childcare scheme covers children up to age 15, or 16 if the child is registered disabled.
Keep full records
If your limited company runs a childcare scheme, you’ll need to keep accurate and up to date records showing that all of the above criteria have been met. This includes details of the childcare provider and their registration number, the expiry date of their registration, and the name and date of birth of the child receiving childcare.
Basic earnings assessment
As stated above, anyone who joined the childcare scheme after 6 April 2011, will need to have a basic earning assessment carried out when they join the scheme and also at the start of every subsequent tax year. The assessment will apply for all of that tax year. If an employee is taken on part way through the tax year and wants to join the childcare scheme, they should be assessed on their projected earnings for the whole year.
Included in the assessment are such things as basic pay, any relevant regional allowances such as London weighting, shift allowance and taxable benefits. Discretional or performance-linked bonuses, overtime, and those benefits already exempted such as pension contributions are all excluded from the assessment.
There is no specific mention of ‘dividends’ in the official guidance to reclaiming childcare costs, but as they are not considered a standard way of paying staff, it is reasonable to assume that they are excluded from the assessment. Check with your accountant if you have any concerns.
Once you’ve carried out a basic earnings assessment you can calculate tax and NI exempt amounts. For help with this or to check out the latest thresholds, visit this GOV.UK page. Remember to keep detailed records of your basic earnings assessment calculations. You don’t have to send these to HMRC but they do expect you to make them available on request.
Tax-Free Childcare post-October 2018
From 5th October 2018 onwards, you will no longer be able to apply for the childcare vouchers scheme. However, if you are a member of an existing vouchers scheme, and received your first voucher before the closing date, you can keep on receiving vouchers for as long as the scheme runs.
After this date, parents will be able to apply for a new childcare scheme – Tax-Free Childcare.
The Government will pay £2 for every £8 you pay to a childcare provider via your online account. Up to a maximum of £2,000 per year.
You will not be eligible if you or your partner earn £100,000 or more per year.
Find out more about the new scheme on the Gov.UK site.
Get professional help
For some contractors or small business owners, carrying out basic earnings assessments, reporting to HMRC and staying compliant with childcare scheme legislation may seem pretty daunting. If that sounds like you, we strongly recommend asking your accountant or financial advisor for help!