Overview of the changes 

The legislation for Childcare Vouchers changed on 6th April 2011. The change affects higher rate and additional rate tax payers who applied to join the scheme on or after 6th April 2011 whereby a restriction was placed on the amount of vouchers that are exempt from tax and National Insurance. All parents who applied to join the scheme up to 5th April 2011 can continue to receive the existing tax and National Insurance exemption indefinitely - regardless of earnings.

All parents could previously receive up to £55 per week (£243 per month) of vouchers which are exempt from tax and National Insurance.

However, higher rate tax payers who join the scheme on or after 6th April 2011 will only be able to receive £28 per week (£124 per month) tax and NI exempt. Additional rate tax payers who join the scheme on or after 6th April 2011 will only be able to receive £22 per week (£97 per month) tax and NI exempt. Basic rate taxpayers will be unaffected, although only those that joined before April 6 2011 will still be able to receive tax exemption on the full amount if they become a higher rate taxpayer in the future.

The purpose of the new restrictions is to standardise the income tax savings as shown below.

  Rate of Income tax  Weekly tax exempt entitlement Weekly tax saving
Basic Rate 

20%

 £55 £11
Higher Rate 40% £28 £11
Additional Rate  50% £22 £11

However in practice higher and additional rate taxpayers will save less than a basic rate taxpayer as this just considers income tax and does not take into account that higher and additional rate taxpayers pay less National Insurance.

The tables below demonstrate the savings for parents who join the scheme on or after the 6th April.

 Status  Annual Tax exempt amount  Savings
Basic rate (contracted out) 20% tax 10.4% NI  £2,916  £886
Basic rate (contracted in) 20% tax 12% NI  £2,916  £933
Higher rate category 40% tax 2% NI  £1,484  £623
Additional rate category 50% tax 2% NI  £1,166  £606

At the start of each tax year and when an employee joins the scheme after 6th April 2011, employers must complete a basic earnings assessment of that employee. 

This should be using figures applicable at the start of that tax year. If they join the scheme midway through the year, the employer should pro-rata their monthly salary to establish the annual amount and determine which tax band they will fall into

This should include: 

  • basic pay as stated in the employee’s contract of employment
  • guranteed bonuses;
  • commission (based on the previous year’s commission income or an average of the previous two years, if lower
  • London weighting or other regional allowances
  • guaranteed overtime payments (e.g. payments of 4 hours' guaranteed overtime for working on Saturdays, even if the amount of time actually worked is less
  • shift allowances
  • special payments for specialist qualifications (e.g. First Aiders
  • taxable benefits that would fall within Part 3 of the Income Tax (Earnings and Pensions) Act 2003, and are not exempted under Part 4 of that Act (e.g. a company car made available for private use; free fuel provided by an employer-supported childcare in excess of £55 per week; living accommodation, etc

However the assessment should not include tax exempt benefits (such as childcare vouchers, pension contributions via salary sacrifice, bikes to work), overtime payments, discretionary or performance related bonuses. 

Once the employee has been assessed, the tax free allowance is set until the next tax year regardless in any changes in an employee’s circumstances.  For example if an employee was assessed as a basic rate taxpayer when they joined the scheme, but had a subsequent pay rise that took them into the next tax bracket, they would still be entitled to £243 until the start of the next tax year.  The basic earnings assessment should be based on the information that is available to the employer when the employee enrols on the scheme. 

To give a very rough guide, an employee who receives no other benefits and wishes to salary sacrifice the maximum amount for childcare vouchers would be considered a basic rate taxpayer if they were earning up to £45,391.  This is because the higher rate threshold for the year 2011 – 2012 is £35,000.  The personal allowance (£7,475 for 2011 - 2012) is deducted from the overall figure to give £37,916 and the tax and NI exempt childcare voucher salary sacrifice can also be deducted as the employee wishes to take the maximum (£2,916) which brings it down to £35,000.

The employer is required to keep a record of the figures used to determine the employee’s basic earnings.  If the employer gets the initial assessment wrong and provides an employee with tax exemption they are not entitled to, the excess should be reported on the P11D.

 

Employees who joined the scheme prior to 6 April 2011 

Employees who have already joined the scheme prior to 6 April 2011 are unaffected indefinitely unless they change employers or leave the scheme. HMRC have confirmed that an employee can stop receiving childcare vouchers for a period of up to 12 months and still be considered ‘in the scheme’ and therefore not be subject to the new restrictions.

Additionally, an employee is still considered as in a scheme if:

  • Their employer changes childcare voucher provider
  • They are moved to another employer due to a merger or acquisition
  • They have been transferred to another employer under a TUPE arrangement
  • They re-enrol on the scheme as part of annual flex renewal or suchlike
  • They change the amount of childcare vouchers they receive

View HMRC’s most recent guidance or Contact Us for more details:

Parents

Employers