12 December 2004
Labour's tax credit for nannies will be "useless"
Parents will get some help towards the cost of childcare – if they earn less than £59,000
By Claire Francis
Many parents are unlikely to qualify for help towards the cost of a nanny, despite government claims last week. Margaret Hodge, the children’s minister, said that from next April parents employing a nanny could get up to £210 a week from the Government. At present the tax credit is available only for children who are cared for at a nursery or by a registered childminder.
Parents with one child will be able to claim up to £122.50 a week, or £6,370 a year; people with two or more children will receive up to £210 a week £10,920 a year.
But experts accused the Government of exaggerating the effects of its changes to the tax credit system, because most families who employ a nanny probably won’t be eligible for state help. Mike Warburton of Grant Thornton, an accountant, said: “This initiative is typical of the government – it sounds great, but when you delve a bit deeper you discover it’s not as good as it seems and will be of no practical use to many families.”
The credit is tapered according to the household income. If it is £59,000 or more, you will not be entitled to any help. The average salary for nannies in London is £27,000, according to Nannytax, a payroll company. Outside the capital, nannies earn about £20,000. Parents have to pay their nanny's salary, plus tax and National Insurance Contributions (NICs) out of their own taxed income. If your nanny earns £27,000 a year, she actually costs you just under £30,000. Francesca Lagerberg at Smith & Williamson, an accountant, said: “Most people with nannies probably earn more than £59,000 a year and therefore will not qualify for any tax credits.”
Only households with a joint income of £5,220 or less will qualify for the full benefit of £19,735. It is then gradually reduced until the cut-off point for families with two children of £43,668, rising to £58,558 from next April. If your income is near the top of the threshold, you will get very little state support. For example, households with two children and a joint income of £57,000 would get just over £570 a year.
If your household income is less than £59,000 and you are eligible for the tax credit, your nanny must register with the Childcare Approval Scheme to be run by Nestor Primecare Services so that you can claim the benefit. Registration will cost £96 and must be renewed annually.
Parents may also get help from employers. Firms will be able to give staff vouchers worth £50 a week, whatever their income. Employees will not have to pay income tax or NICs on the vouchers; employers will get NICs relief. The vouchers will save higher-rate taxpayers £984 a year, according to Smith & Williamson. The £50 limit applies to the parent, not the child, so if both parents work for an employer that offers these vouchers the annual savings could be as much as £1,968. However, employers will not be under any obligation to offer childcare vouchers. Experts believe that companies that participate in the scheme will expect their workers to sacrifice some of their salary in return.
The vouchers can be used only with registered childcarers. Nannies will need to have completed a recognised course on childcare and have their qualifications registered with the Childcare Approval Scheme. The £50 vouchers will be welcomed by families that employ a nanny, but many are angry at the Government's portrayal of the extension of the tax credit.
Celia Dixon from Godstone in Surrey said: “If you can afford to pay a nanny, you will almost certainly not qualify for the tax credits. I think Labour has tried to dress up this measure to appeal to the middle classes, but it won't work.”