27 March 2005
How to save £2,000 on childcare costs
A new government scheme offers generous tax relief. Jessica Bown explains how you can take advantage.
Families could get tax relief of more than £2,000 a year on their childcare costs from next month, when the government’s new workplace-voucher scheme comes into force. From April 6, working parents will be able to escape income-tax and national- insurance contributions (Nics) on the first £50 they earn each week, or £2,600 a year, as long as they put the cash towards childcare costs.
The tax relief is available to all parents, regardless of income. It will be worth £1,066 a year to a higher-rate taxpayer and £858 to a basic-rate payer. Each parent will be able to claim, so a family with two higher-rate taxpayers could save more than £2,000 a year. However, the relief will only be available as vouchers from your employer, which must be used to pay for childcare.
Say you earned £50,000 and claimed vouchers worth the maximum £2,600 from your employer. Your salary would in effect be reduced to £47,400 — but you would avoid tax or Nics on the value of the vouchers and your employer would escape Nics on that portion of your salary.
Employers are under no obligation to offer the vouchers, but about 10,000 firms, including Price Waterhouse Coopers and Compass, which owns Upper Crust and Harry Ramsden’s, have signed up. More firms are expected to follow suit in the coming months.
Anne Ross of Accor, Britain’s biggest voucher provider, claims companies can save £332 a year in Nics for every employee who signs up, compared with a cost of just £10 to £20 a month per worker.
If your company has no plans to offer the scheme, registering your interest with the human-resources department could make a difference. Many firms already offer workplace vouchers, which are deemed an employee benefit. You can generally escape Nics on this benefit, but there is no income-tax relief.
However, the value of the vouchers on which you can claim Nics relief is uncapped, whereas the new scheme has a limit of £50 a week. In some cases, therefore, parents could be worse off under the new rules.
Mike Warburton of Grant Thornton, an accountant, said: “Nics relief on childcare vouchers of £155 a week is worth more to parents who pay the basic rate of tax than both Nics and income-tax relief on £50 a week. But higher-rate taxpayers will be better off with the new scheme.”
However, the new scheme has one big advantage: the vouchers can be used to fund any form of childcare, whether it be a childminder, nanny, nursery, after-school or holiday play scheme for older children — as long as the carer’s qualifications are recognised by government-approved bodies such as Ofsted or the National Care Standards Commission (see contacts below).
The new scheme is therefore expected to have wider appeal that the old one, which excluded nannies. Nannytax, a domestic payroll service, recently calculated that the average nanny in London costs £27,000 a year plus £2,848 in Nics, all paid out of the parents’ net income. That means a couple would have to earn £39,000 before tax just to pay their nanny.
However, the downside is that if your existing childminder or nanny is not approved, the costs of registration will fall to you. Warburton said: “Many parents would prefer to continue using their usual nanny or childminder, but they can do so only if they pay to register them. This could cost thousands of pounds.”
There are other voucher schemes available. Some employers give a certain amount every week to a limited number of workers out of their own pockets.
However, companies that offer vouchers under the new scheme, and ask workers to sacrifice some of their salaries in return, must make the vouchers available to all employees.
Derek Hayes of Family Matters, a firm that administers the scheme, said: “Salary sacrifice is the route favoured by most employers because it keeps their costs down and opens up the scheme to all workers.”
You can usually choose to receive vouchers with your payslip or by post, or have the benefit paid electronically to your nursery or childminder.
But claiming the new childcare vouchers could mean losing out if you qualify for the childcare element of the government’s working-tax credits — available to households with incomes of up to about £43,500.
Currently, parents can claim 70% of up to £200 a week spent on registered childcare for two or more children, or £135 for one child. These limits will rise to £175 or £300 a week from next month.
However, families receiving childcare vouchers from their employers cannot claim again for the same costs through tax credits.
The Inland Revenue website has a calculator to help you decide whether or not you should claim the vouchers.
Copyright 2005 Times Newspapers Ltd.