Childcare vouchers are not always well known or understood. They are commonly viewed as a scheme that only employees can benefit from, however, this isn’t the case Contractors can benefit too.
What are Childcare Vouchers?
A government initiative to help working parents afford quality childcare.
Childcare vouchers can save parents a significant amount in tax each year on childcare costs for those with qualifying children.
Childcare vouchers tend to be associated with those employers who choose to provide this benefit to their employees, but contractors can also benefit from this initiative. As the scheme is not very well publicised a large majority of contractors fail to benefit from it.
Essentially, Childcare Vouchers enable you to pay for childcare out of your pre-tax income, whether it be the company or personal income.
The qualifying age for childcare vouchers
You can use Childcare Vouchers for children up to the age of 15 or 16 if they are disabled. The child must be either your own child or your stepchild and live with you, for which you have parental responsibility.
Childcare Vouchers – The Basics
To qualify for the tax exemption the childcare must be provided through a registered or approved childcare. To check the definition of registered or approved where you live i.e. England, Ireland, Scotland, Wales please refer to the HMRC website:
If paying for childcare vouchers from your gross pay (on or after 6th April 2011)
If you were already using childcare vouchers before 6th April 2011 you will continue to receive the full exempt allowance of £55 per week regardless of basic/higher rate tax as long as your work contract has not changed and there are no breaks in your voucher allocations of 12 months or more.
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The allowance is per working parent not per household. Amounts in excess of the exempt amounts stated above are liable to tax and NIC’s and also have to be reported as a benefit in kind.
Childcare vouchers can be saved up, for example, to meet higher childcare costs during school holidays.
How do Childcare Vouchers work for contractors running their own limited company?
Contractors simply source an approved childcare provider and arrange for their own limited company to pay the childcare provider directly. Doing it this way means the company receives tax relief on the payments which helps reduce your companies corporation tax bill.
Check to see if there is any impact on other benefits you receive, i.e. Tax Credits. In some cases, you may be better off not using childcare vouchers as it may remove/affect your entitlement to Tax Credits. Please refer to the HMRC website for further information:
It is important to speak with your accountant as to which option (salary sacrifice or addition to salary) is the most suitable for you based on your individual circumstances.
Childcare vouchers – frequently asked questions
Is VAT Chargeable on childcare vouchers?
No. Childcare is exempt from the VAT.
Where can I get information about childcare in my area?
You can speak to your accountant if you have one or visit www.gov.uk, alternatively, your local authority can help you find registered childcare.
Where can I get more information and advice about getting help with childcare?
The Daycare Trust (National Childcare Charity) aims to secure access to high-quality affordable childcare for all.
Can I get a refund for any vouchers I don’t use?
HMRC allows vouchers to be refunded but this tends to be restricted to vouchers issued in the current tax year.