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Childcare vouchers can cut contractor tax liabilities

Contractors with children who fit HMRC’s eligibility criteria can offset the cost of childcare against their personal and corporation tax liabilities. This could mean a saving of up to £2,392 for some contractors.

According to Clair Jolly of specialist contractor accountant and umbrella company Danbro, tax rule changes in 2005 mean that childcare vouchers are non-taxable. They are also exempt from National Insurance Contributions (NICs) for employees, and save employers’ NICs.

“Both contractors employed by their own limited company and umbrella company contractors can qualify for childcare vouchers,” explains Clair. “Yet many contractors with families don’t take advantage of this valuable tax break because the scheme isn’t widely publicised.”

Childcare vouchers – how they work

Employers, and this includes umbrella companies and contractor limited companies, can give their contractor employees childcare vouchers up to the value of £55 per week free from income tax and national insurance contributions, if they satisfy HMRC’s eligibility criteria.

“In simple terms this means a saving of 31% of the total amount claimed for basic rate tax payers and 41% for higher rate tax payers,” continues Clair. “So for every £100 a basic rate tax payer pays from their wages they receive roughly £130 in Childcare vouchers.”

Clair continues: “The allowance is per parent and does not depend on the number of children in the household. So, two working parents could qualify for £486 per month in tax-free childcare which could lead to a tremendous saving for the family of £2,392 per year!”

But, warns Clair, payments above the £55 per week limited are subject to income tax and NICs, and also have to be reported as a benefit in kind.

Umbrella and limited company contractor schemes

An umbrella contractor’s umbrella company will deduct the £55 every week from the gross payment amount received from the contractor’s agency or client. The contractor will receive their childcare voucher and the childcare provider will be paid direct by the umbrella company.

“Limited company contractors can choose to administer their own childcare voucher scheme,” says Clair, “or they can choose to pay an external childcare scheme operated by a third party supplier.” Danbro has a scheme – Danbro Childcare Vouchers - for limited company contractors who want to outsource their childcare voucher scheme and, according to Clair, outsourcing childcare vouchers is generally more cost-efficient than managing a scheme in-house.

Limited company contractors can choose to administer their own childcare voucher scheme or they can choose to pay an external childcare scheme operated by a third party supplier

Clair Jolly, Danbro

Under the Danbro Childcare Scheme, the contractor’s limited company is invoiced directly by Danbro, who then pay the childcare supplier direct. This ensures that the process is totally compliant and frees-up the contractor from having to manage the administration burden.

HMRC’s eligibility criteria

Contractors must satisfy HMRC’s eligibility criteria before they can benefit from any tax breaks. For most contractors, this is fairly straightforward. HMRC says that any children must be:

  • a child or stepchild of the contractor employee at whose expense, either in full or in part, the child is maintained; or
  • resident with the contractor employee and for whom the employee has parental responsibility;
  • qualifies up to 1st September after their 15th birthday (or 1st September after their 16th birthday if they are disabled).

In addition, the childcare vouchers can only be used for registered or approved childcare. However, it is not only pre-school nursery costs that are eligible. Legitimate childcare can include:

  • Registered child minders, nurseries and play schemes
  • Out of hours clubs on school premises, run by a school or local authority
  • Childcare schemes run by approved providers
  • Childcare given in a child’s home that has been approved under a government scheme
  • Accredited childcare for 8s and over by an approved organisation.

Guidance from HMRC confirms that small employers, such as limited company contractors that employ a contractor and their spouse, are eligible to pay childcare vouchers as long as they “ensure that the qualifying conditions for the exemption are met and that they maintain sufficient records in order to be able to demonstrate that this is the case.”

Clair concludes: “Contractors with children under 16 could legitimately be saving themselves a significant amount of tax and NICs, by asking their umbrella company to implement a scheme or running one through their own limited company.”

Published: Thursday, 18 June 2009

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