Please note: applications to the childcare voucher scheme are now closed, however if you registered and received your first vouchers before 4th October 2018, you may be able to continue receiving them. Tax-Free Childcare is a new program that helps people pay for childcare – scroll down to read more.
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.
The Childcare Voucher Scheme is not just for full-time employees. As a director and 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 is not accepting new users as of October 2018
New applicants are no longer accepted into the childcare vouchers scheme, however if you entered into it before 4th October 2018 you may still be able to receive vouchers or directly contracted childcare through the scheme. However if you were to close down your company you would also exit the scheme, as you would cease to be an employee of the company.
The childcare voucher scheme was closed to new applicants in order to roll out the new Tax-Free Childcare program.
What is Tax-Free Childcare (TFC)?
Under Tax-Free Childcare, parents can open a childcare account and receive a government top-up of £2 for every £8 that is paid into the account – thus saving 20% on childcare costs. The maximum benefit is £500 every three months – or £2,000 a year.
You can use the funds for approved childcare, including:
- childminders, nurseries and nannies
- after school clubs and play schemes
- home care agencies
In order to benefit from this program, the parent must earn £131 per week minimum, and if you’re in a couple both must be working. Help with childcare under this program goes up with the number of children, which benefits larger families more than the childcare vouchers scheme.
Tax-Free Childcare is available for those with children up to 11 years old, or 16 if the child has a disability. You can also benefit from the 30 hours free childcare system for an extra boost of childcare support.
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.
Using the childcare voucher scheme, if you are able, 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 use this scheme instead of Tax-Free Childcare.
If you are a busy parent running your own limited company, you may want to consider the Tax-Free Childcare program to help you pay for childcare. Speaking to your contractor accountant will help you determine whether this is the best option for you in a tax planning sense.