Question
I’ve heard that there were some tax changes which came into force in April 2011 relating to the childcare voucher scheme. Do I need to do anything?
Answer
You’re right, there are tax changes in April which will affect you if you offer a childcare voucher scheme, otherwise known as an ‘employer-supported childcare’ (“ESC”) scheme.
From 6 April 2011 all new ESC Scheme joiners, regardless of income level, will only be entitled to the same basic rate tax relief, whereas higher and additional rate taxpayers who, as at 5 April 2011, are already participating in such schemes will continue to benefit from higher or additional rate relief. Employers will also now need to estimate the ‘basic employment earnings’ likely in the coming tax year for those joining ESC Schemes on or after 06 April 2011 to ensure that the correct tax relief is applied.
To be clear, new joiners to certain childcare and childcare voucher schemes on or after 6 April 2011 will only be entitled to basic rate tax relief, even if they are or later become higher or additional rate taxpayer employees, whereas taxpayers who already participate in such schemes as at 5 April 2011 and basic rate new joiners will continue to benefit from the existing levels of income tax and National Insurance contribution relief, both of which are currently on the first £55 per week.
From April 2011, employers who provide ESCs will, at the beginning of each tax year, be required to estimate the level of ‘basic employment earnings’ that an employee is likely to receive during that year. ‘Basic employment earnings’ means contractual wages or salary (post salary sacrifice if appropriate) and taxable benefits in kind, but does not include overtime earnings or bonuses. Employers will not need to make an assessment for employees who already participate in their ESC Scheme on or before 5 April 2011.
If basic employment earnings change during the course of a tax year, employers should assess the employee's pay at the beginning of the next tax year or when the employee first applies to join the scheme. The level of exempt income is then fixed for that tax year based on the initial assessment. Changes during the course of the year may mean that the exempt income entitlement will be reduced from the start of the following tax year.
Without going into all the mathematical details, at current tax rates, this means that higher (40%) and additional rate (50%) taxpayers should receive approximately the same £11 per week income tax relief as basic rate tax payers. Tax relief from National Insurance Contributions will depend on the amount of contracted childcare and childcare vouchers that an individual can disregard for tax purposes, and the rate of NICs that they pay. This is not changing.
Don’t forget that the tax treatment of ex gratia termination payments over £30,000 is also changing from 06 April 2011.
If you would like to know more, please contact Peter Jones, Associate in the Employment Team, in confidence and without obligation by emailing Peter or by calling him on 08450 990045, or speak to your usual contact in the Employment Team.
This answer is provided for information only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.
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