New Government rules from 6^th April 2011 will restrict the amount of tax relief available for Childcare Vouchers or Directly Contracted childcare.

The ‘old rules’ allow £55 per week(£243 per month) tax and NI free, which allowed for greater savings the higher the rate of tax paid:

 

Now the Government wants everyone to receive the same benefit so tax relief is restricted to 20% only.

This only affects new entrants after 6^th April 2011; existing scheme members can still receive full tax relief.
 

Things that won’t affect existing scheme members

 

 

 

 

This assessment must now be carried out to identify the notional annual tax liability to control the amount of vouchers available to employees.

It must be carried out when a new employee wishes to join and annually for all entrants post 6th April 2011.

It cannot be worked out on the previous year’s earnings (from form P60); it must be based on expected future earnings. 
 

• Basic pay as per employment contract
• London Weighting or other regional allowances
• Contractual or guaranteed bonus
• Shift allowance
• Taxable benefits i.e. company car
• Commission (based on previous 2 year average)
• First Aid allowance
• Guaranteed overtime
• Employer supported childcare in excess of £55 per week

 

 

• Non contractual/discretionary bonus
• Non contractual overtime
• Benefits already reported to HMRC
• Pension
• AVC
• Share Incentive scheme
• GAYE

 

These items must all be added and subtracted to arrive at an earnings total; this can be assessed as below:

 

Salary level	Tax rate	CCV per week	CCV per month	CCV Annual
Up to £42,475	Basic 20%	£55.00	£243.00	£2,915.00
£42,475 - £150,000	Higher 40%	£28.00	£124.00	£1,484.00
£150,000 +	Additional 50%	£22.00	£97.00	£1,166.00

The chicken and egg dilemma

This assessment must take into account salary sacrifice deductions and therefore needs to be done before sign up to allow the employee to be correctly advised of their entitlement. However, the assessment must be carried out again if the employee signs up as this will affect their future earnings and could change the level of voucher entitlement.

 

Double the work?

Employers must assess pay every year to identify any changes in tax status. After the employee has agreed and signed up, earnings must be assessed again after agreement of salary sacrifice.

This will require the issue of new contract and compliance check.

Employers need to be more aware of mid-year legislation which might affect these calculations (i.e. changes in tax bands) whereas usually a glance at the annual budget would suffice.

Any other in year changes, like a large salary increase, which might change the amount of vouchers awarded should not be assessed until the following April.

An employee returning from maternity leave who decides to join the scheme should have her earnings assessed from her return date to the next April – the portion of the year either unpaid or on Lower rate SMP should not be included.

Assessment must only be based on these employment earnings. You would not include any P45 figures and benefits and allowances must be pro-rated from start date.

These assessment records do not need to be submitted to HMRC but must be kept on file in case of audit or Revenue inspection.

 

If you get this wrong

If the calculations were performed using legitimate figures and a change mid-year causes your calculation to be incorrect, HMRC will honour the tax relief at the rate advised.

If an error has been made through carelessness or inaccurate accounting, HMRC will expect the additional over claimed voucher amount to be entered onto a P11d so that employee will pay the extra tax and NI due. The Employer will be liable to additional Class 1a NI contribution.

 

What to do next?

If you are using our payroll service, you can be assured that we will carry out these calculations for you and keep you updated on the rules and regulations.

If you run your own payroll, or outsource it, you need to check with your payroll department to ensure that these new rules are being implemented correctly.

For a free initial consultation on how we can help you with your payroll please ring Margaret Sands, Payroll Manager on 01235 553333.