Tax efficiency with smart childcare

For the majority of contractors and consultants, running a small limited company means that it is often not cost effective to set up a childcare voucher scheme; however you can pay for childcare through the company by contractual agreement with a commercial nursery or childminder. This way you can increase your personal tax efficiencies.

Requirements

The company must be invoiced directly by a nursery or childminder and the payment will be free of tax and NICs for you as an employee as long as the following criteria are met. The exemption does not apply if the company reimburses the cost or settles the bill on your behalf.

  • The payment is up to the relevant exempt amount per employee (see below);
  • The scheme is available to all employees;
  • The child lives with the employee and the employee has parental responsibility for the child;
  • The childcare provider is registered or approved; and
  • An estimate of the employee’s relevant earnings has been made by carrying out a basic earnings assessment and kept in case it is required by HMRC. You must do this annually.

Relevant earnings are calculated by taking your salary plus benefits less your personal allowance.

For the 2016/17 tax year, as long as this does not exceed £32,000, tax relief is available on £55 per week (£243 per month). For relevant earnings between £32,000 and £150,000 this is reduced to £28 per week (£124 per month). Any amounts paid above these are a benefit in kind and need to be reported on a P11D form.

Next steps

Obtain and file a copy of your childcare provider’s registration details i.e. their professional body and registration number.

Ensure they provide you with correct invoices containing the following:

  • Their name and address
  • Registered childcare provider number or equivalent
  • Date of invoice
  • Invoiced to your company (not you personally)
  • Service description and amount.

You need to ensure that your company pays them directly from your business account and record the cost of childcare as a business expense.

This post has outlined how to look after your family in a tax-efficient way, the next one will detail how to plan for your retirement. Follow us on Facebook, LinkedIn and Twitter to hear first when it arrives.