Childcare schemes and contracting

On the 5th October 2018, a new Tax-Free Childcare Scheme was launched, meaning that any new applications for tax relief on childcare need to be made direct to the government. This article explains how childcare schemes work for Limited Company contractors, both prior to and after this change.

 

Tax-Free Childcare post-October 2018

From 5th October 2018 onwards, 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 earns £100,000 or more per year.

As a contractor this means that you are individually responsible for organising your childcare tax relief, with no involvement from your Limited Company.

 

Qualifying conditions

To qualify for the Tax-Free 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

 

If you signed up to a childcare scheme prior to October 2018

Those who signed up to a scheme prior to 5th October 2018 can still continue to use this as long as the employer still runs the scheme and they are still an employee. With an existing direct agreement, the Limited Company pays the provider for the childcare costs on behalf of the employee. The amount that is paid to the childcare provider is detailed in an agreement between the employer (Ltd Company) and employee.

If you joined before the 6 April 2011, the company could contribute £55 per week or £243 a month, which is exempt from income tax and national insurance, while gaining corporation tax relief through the company.

Any joiners after this date would depend on the taxpayer and whether they are a basic rate, higher rate or additional rate taxpayer:

 

WeeklyMonthlyAnnual
Basic rate taxpayers£55£243£2,916
Higher rate taxpayers£28£124£1,484
Additional rate taxpayers£25£110£1,325

 

Any direct agreement after the 5th October 2018 will be treated as an employment benefit and declarable on the P11d.

If you’re an Intouch client and you need help with any tax matter, just contact your Personal Accountant. If you’re not already with us and would like to find out more about how Intouch can help you contract through your Limited Company, just contact us on 01202 901 385.

 

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Claiming the cost of childcare from your Limited Company

Claiming the cost of childcare from your Limited Company

If you are an employee of a Limited Company then you can claim a set amount per week, or per month, toward the care of your children.  The childcare has to be via a registered provider, and in many cases this will include private schools and pre/after school clubs.  Check with your provider to see if they accept childcare vouchers.

How much can the company pay?

Since 6 April 2011 childcare allowances have been based on your total income in the tax year (prior to that they were a flat amount per week regardless of what you earned).  The rates are as follows:

  • Basic rate – up to £55 per week
  • Higher rate (40%) – up to £28 per week
  • Top rate (45%) – up to £22 per week

The childcare allowance is available for each employee of the business, not each child, so if you and your spouse are both employees then you can each claim.

Total income in this context does not include any dividend income.  As most Limited Company contractors take a low salary with the majority of their income taken as dividends, many will be within the basic rate tax threshold and will therefore be able to claim the maximum amount.

Do I need a childcare voucher provider?

There is no need to go through a voucher provider unless you wish to save up the vouchers to use them at a later date.  This can be useful when the baby is first born, before you’re actually incurring costs.  You’ll have to pay an admin fee to the voucher provider but that will work out less than the tax you’ll save by doing it.  Then, as soon as you start incurring actual childcare costs, just cancel the vouchers, use the ones you’ve saved and start paying direct from your company.

It is important to note that a contract must be in place between your Limited Company and the childcare provider though, and payment must go direct from the company bank account.  If the company simply reimburses your expenses it becomes a benefit in kind and there are negative tax implications for you personally.

Child benefit

There have been recent changes to child benefit that you should be aware of too.  If your income, or that of your spouse, is over £50,000 then the tax return of the higher earner will claw back the child benefit and it will be repaid along with any tax due.  If you know your income is likely to be over that limit in future then you can either inform HMRC now that you don’t want the benefit, or just repay it at the end of each year (like an interest free loan).

It can be better to claim and then repay because your circumstances may change part way through a year, and you cannot backdate a claim.  So if you don’t claim but later realise you could have, you’ve lost the money.  Claiming will also mean your spouse will have their record marked as a qualifying year for pension purposes (even if they claim but then tell them they don’t want the money!)

For the most tax efficient option for your circumstances, speak to your contractor accountant who can look at your overall tax position and advise you accordingly.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.