This blog covers the frequently asked subject of childcare costs for contractors.
Contractors who work through their own limited company are considered to be employees of the company. Therefore, as an employee of your limited company, you can pay for your child care costs through your business until your child is 15. It means you can be exempt from tax and national insurance of up to £55 a week or £243 a month on childcare costs.
There are two ways in which you can receive this benefit:
- Childcare vouchers
- Directly to the registered childcare provider
This benefit is available to parents whose children go to registered childcare provider such as:
- Breakfast Club
- After school club
- Holiday camps
It cannot be given to family members who help out with childcare unless they are a registered childcare provider. There is a ‘Grandparents credit’ available for grandparents who help out with childcare. More information on this can be found here: https://www.gov.uk/government/publications/national-insurance-application-for-specified-adult-childcare-credits-ca9176
This is the most popular method as you can take the full tax-free amount in vouchers each month. You can then save them up to use in the future for school holiday clubs or until your child is old enough to use them. Some of the child care voucher scheme providers include:
Their websites will have more details on how to set it up. However, there is an admin fee for this which can vary from 3% to 10%. It makes it less cost effective.
Directly to the registered childcare provider
You can request the nursery or childcare provider to send the invoice directly to your company and pay for it through your business bank account. This application can be made by sending a letter to the childcare provider stating how much you will pay per month through your company.
However, if you do not use the full benefit in that month, the remainder is lost. Also, if you pay more than the benefit that is available to you, the excess paid will be treated as a benefit in kind and be subject to tax and NI.
Whichever method you use, it needs to be paid directly through your business account and not your personal account. You cannot reclaim it as a personal expense from your company at a later date. However, the voucher scheme for new applicants is being phased out by 2018, so if you do want to use vouchers you should set it up soon.
Basic Earnings Assessments
The final point you need to consider is how much your earnings will affect the amount of child care exemption you will receive. From 6th April 2011, anyone wanting to join the employer’s childcare scheme will need to have their basic earnings assessed at the point of when they join the scheme. The earnings which are included in this assessment are:
- Basic pay
- Bonuses that are contractual or agrees
- Taxable benefits
Income that is not included:
- Performance related bonus
- Benefits which are exempt such as pensions
Based on this income, you can then assess how much you can provide under the tax and NIC exemption. Broadly speaking:
- Basic rate taxpayer (20%) can receive £55 a week or £242 a month
- Higher rate tax payer (40%) can receive £28 a week or £124 a month
- Additional rate taxpayer (45%) can receive £25 a week or £110 a month
Please contact Southside Accountants Wimbledon for your tax and accountancy needs.
Written by Nisha Patel – Chartered Certified Accountant and a Tax Expert.