As a Director of a limited company you are able to claim a percentage of the costs of childcare as an expense through the government’s Childcare Voucher Scheme. The scheme allows you to claim up to £55 per week or £243 per month towards childcare costs incurred.
Contrary to popular belief, the Childcare Voucher Scheme is not just for full-time employees. As a director and sole employee of your own limited company, you can benefit from the scheme as well.
What are childcare vouchers?
Childcare vouchers may be purchased through voucher providers such as Busy Bees or Kiddi Vouchers, or directly from a registered childcare provider. Purchasing childcare vouchers is an easy way as a parent to save on the cost of childcare. If you have a child or children up to the age of 15, you can purchase childcare vouchers to use towards high-quality childcare.
How does the Childcare Voucher Scheme work?
If you are a director of your own company and you will incur childcare costs, you can benefit by purchasing childcare vouchers with your business bank account. In doing so, your company will receive tax relief on the childcare voucher payments, which will help reduce your Corporation Tax bill.
Purchasing childcare vouchers can be done in one of two ways. You can either purchase the vouchers from a voucher provider as mentioned above, or set up a direct agreement with your chosen registered childcare provider, whereby you will purchase vouchers from them by paying them directly. This direct agreement method is recommended for contractors with a limited company, as you do not have to face the added step of going through a third party provider. Additionally, going directly to the childcare provider lets you avoid the administration fee charged by most third party voucher providers.
There is a specific weekly allowance you could be entitled to, as an individual rather than per child, in childcare vouchers before being subject to income tax and National Insurance Contributions.
Your tax-free exemption is based on your salary and tax bracket, as outlined in the following table:
|Income tax rate||Weekly tax-free limit||Monthly tax-free limit||Annual tax-free limit|
|Basic – 20%||£55||£243||£2,915|
|Higher – 40%||£28||£124||£1,484|
|Additional – 45%||£25||£110||£1,325|
These tax-free exemption limits do not take into account your dividend income, only your salary.
So if you’re a basic rate taxpayer, and you were to spend £2000 on childcare in a year, you would have to work longer to meet this £2000, as after-tax your take home pay on £2000 would be around £1600 or slightly more depending on your take home pay through your limited company. However, by purchasing £2000 in childcare vouchers your money would go further as this amount is exempt from Corporation Tax through the Childcare Voucher Scheme.
How do you qualify for the Childcare Voucher Scheme?
To be eligible for the Childcare Voucher Scheme, you must meet the following conditions:
- You can only use childcare vouchers for a child up to the age of 15, or 16 years old if the child is disabled
- You must be the parent or guardian of the child, who must live with you
- The childcare must be provided by a registered provider or approved carer who is able to accept childcare voucher
How do I set up a direct agreement with a childcare provider?
The first thing you must do is find a registered childcare provider that accepts childcare vouchers. Then, arrange for a direct agreement to be made between the provider and your limited company, not you as an individual. To do this, your company must write a letter to the childcare provider stating that you are purchasing childcare vouchers for your chosen amount. You will then arrange for the childcare payments to be made directly from your business bank account.
Before this is done however, it is recommended that you carry out an earnings assessment to clarify exactly how much in tax and NI-free childcare you are entitled to. If you’re unsure, it’s best to speak to an accountant about this. Clients of Churchill Knight & Associates Ltd can receive clarification of their income tax rate as part of our limited company accounting service.
What if my childcare costs are above the tax-free exemption limits?
If you’re a basic rate taxpayer, for example, and your childcare costs are above £55 per week or £243 per month, you will have to pay for the difference from your after-tax income. For example, if your childcare costs amount to £400 per month, you would be able to use the Childcare Voucher Scheme for £243 of this cost, but the remaining £157 would be paid for by income that has already had income tax and National Insurance deductions taken.
The Childcare Voucher Scheme will not be accepting new users from April 2018
If you know you could benefit from the Childcare Voucher Scheme, you must enter the scheme before April 2018 as after this date no new applicants will be able to join. The scheme will still run as long as there’s still a demand for it, however if you were to close down your company you would also exit the scheme.
The reason that no new entrants to the scheme are allowed from April 2018 is due to the introduction of Tax-Free Childcare.
What is Tax-Free Childcare (TFC)?
Under the Tax-Free Childcare scheme, parents can open a Tax-Free Childcare bank account, and “receive a government top-up of £2 for every £8 that they pay” into the account. Currently the scheme is available for children aged five and under.
When the full rollout is complete in March 2018, the scheme will be available for those with children under 12 years old, or under 17 years old with a disability.
However, some parents will lose out on the ability to benefit from this scheme, and others would still benefit more from the Childcare Voucher Scheme. For example, to qualify for Tax-Free Childcare, both parents must be in work and earning at least £120 per week, but not more than £100,000 each per year. Furthermore, the benefits of TFC are less than the Childcare Voucher Scheme for a family of two working parents and one child, for example. You can find more information on which scheme you would benefit more from here.
Your best option is to evaluate which scheme is better for you and your circumstances, however if it turns out that you would benefit more from the Childcare Voucher Scheme, then you should join it as soon as possible if you have not already done so.
Regardless of whether you choose to use the Childcare Voucher Scheme or Tax-Free Childcare, you and your child/children could still benefit from the 30 hours free childcare system.
What is the ‘30 hours free childcare’ scheme and how does it work?
The 30 hours free childcare scheme, available from September 2017, is a separate system to the Childcare Voucher Scheme and Tax-Free Childcare.
Under this system, all three and four-year-olds whose parents are living and working in England are entitled to 30 hours of free childcare per week – valued at around £5,000 per child or 1,140 hours per year. The eligibility requirements of this scheme are the same as Tax-Free Childcare, however unlike Tax-Free Childcare you may continue to get other types of support in addition to 30 hours free childcare:
- Tax credits
- Universal Credit
- Childcare vouchers
- Childcare grants and bursaries
Both parents/partners in the household must each expect to earn the equivalent of 16 hours per week at the National Minimum Wage in order to qualify for 30 hours per week of free childcare.
There are 15 hours free childcare per week available to three and four-year-olds regardless of whether both parents are working – equivalent to 570 hours free childcare per year.
Opting for the Childcare Voucher Scheme could impact your eligibility for Child Tax Credits or the child element of Working Tax Credits, if you currently receive them or would expect to in the future. It is important that you accurately assess your situation before making a decision to join the scheme.
Many contractors who are parents and operate their own limited company don’t take advantage of the Childcare Voucher Scheme, or are unaware that they could be eligible for it as they don’t have a permanent employer. It’s important to know your options as there could be tax savings available to you that could save you thousands.
Tax planning is one benefit that having a contractor accountant has over completing your own accounting. Having access to a knowledgeable expert who knows the contracting industry is priceless and could save you over and above the cost of hiring an accountant.