The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
EMPLOYER-SUPPORTED CHILD CARE
How does a tax saving of £1,000
per annum sound to you? That is the
benefit some employees stand to gain from a change in the taxation of employer
supported child care arrangements which comes into effect on
Whether you are an employer or an employee, now is the time to start discussing these new arrangements so that you are ready to take full advantage from 6 April.
At the moment, employees are not charged to income tax on the benefit of an employer provided workplace nursery or creche. This exemption has been valuable to the employees of larger concerns who can afford to fund such benefits. But the provision of such benefits is beyond the means of smaller employers and consequently their employees have missed out on the tax subsidy of child care costs.
With effect from
The assistance must take the form of employer-contracted childcare or childcare vouchers.
An employee is only entitled to one exempt amount even if care is provided for more than one child. But if both parents work and their employers help with childcare then the family can enjoy a tax free amount of up to £100 per week.
The childcare must be provided by a registered or approved carer.
A child is a child for these purposes until 1 September following his or her 15th birthday.
The good news for employers is that the provision of childcare assistance of up to £50 per week is free of employer’s national insurance contributions.
So both employees and employers stand to benefit from the changes.
Typically, what will happen in practice is that employers and employees will enter into salary sacrifice arrangements. Under these arrangements the employee will agree to take a cut in salary but will receive an equivalent amount in childcare support from the employer.
At one extreme a higher rate tax paying couple could save tax and national insurance of £2,132 per annum (£50 x 2 x 52 x 41%). Their employers could save national insurance of £634.40 per annum (£50 x 2 x 52 x 12.2%).
At the lower end of the payscale the advantage for the employee might not be so great. Indeed in some cases where the employee is in receipt of tax credits the change could be marginally disadvantageous. Given the sensitivities here it will be important to establish just what the consequences are for individual employees before embarking on a salary sacrifice scheme.
Even where the employee is marginally disadvantaged it might still be worth introducing a salary sacrifice if the employer is willing to share some of his own savings with the employee.
The other issues to watch out for are
The child care scheme must be open to all the employees.
National Minimum Wage
Child care assistance does not count towards pay for the purposes of the National Minimum Wage. For employers who pay at this rate there is no scope for salary sacrifice.
The salary sacrifice scheme must be set up correctly otherwise the tax and national insurance advantages will not accrue. The Inland Revenue has prepared a very useful booklet on salary sacrifice arrangements. A pdf copy of the booklet is attached to the email version of this newsletter.
What impact might a salary sacrifice have on pension contributions? For example an employer might pay a fixed percentage of salary into an employee’s pension scheme. A reduction in salary will result in a reduction in pension contributions.
It might come as a surprise to find that the childcare voucher scheme is not actually run by the government. The task of distributing the vouchers has been contracted out to a number of private companies. As you might expect they are in business to make a profit and it follows that there are costs associated with setting up and operating a voucher scheme. These costs will offset the national insurance savings of employers who implement voucher schemes.
Without making any recommendation but as a pointer towards further help you might like to visit the websites of the following providers.
advice: Don’t wait
until March or April to do your planning.
Do it now so that you are ready to reap the benefits from
Don’t forget you can enjoy absolutely all the benefits of the arrangements if you run your own limited company. Your company saves employer’s national insurance and you personally save tax and national insurance. In fact the only workers who can’t
benefit directly are the self employed and members of partnerships.
ELEPHANTS AND VANS
You cannot describe one but you know one when you see one. That has often been said of elephants and perhaps less frequently of vans. Unlike elephants, vans have evolved in recent years. You can now buy vans which have all the comforts and refinements of luxury cars. These vans are nothing like the vans we previously recognised.
Does it matter?
Well it matters to the Treasury.
If you have a company car you will know that your ‘benefit’ is taxed very heavily indeed. At the top end of the scale you could be taxed each year on 35% of the list price of the car. In contrast, company vans are taxed very lightly. The measure of benefit is £500 at the most which costs a basic rate taxpayer £110 per annum and a higher rate taxpayer £200.
You can see now why the Treasury has decided to move the goalposts / elephant trap.
First it gets better….
With effect from
Then it gets worse…….
With effect from
The nil charge will continue to apply to those employees whose only private use is travel between home and work.
From 2007/08 a basic rate taxpayer will be looking at a tax charge of £770 and a higher rate taxpayer £1,400. These are increases of 660%.
Our advice: Even after the changes, luxury vans compare well with cars in terms of tax. Be aware of the changes if you are considering a swap between now and 2007.
Commit your van use policy to writing and make sure it is implemented. That way a visiting Inland Revenue PAYE auditor will have to accept no taxable benefit arises.
These changes do not affect self employed van drivers.
After his death, the football agent found himself with the devil in a room filled with clocks. Each clock turned at a different speed and was labelled with the name of an occupation. After examining all the clocks the football agent turned to the devil and said, “I have two questions. First, why does each clock move at a different speed?”
“They turn at the rate at which the members of that occupation sin collectively on earth,” replied the devil. “What is your second question?”
“Well,” said the football agent, “I can’t seem to find my occupation. Where is the football agents’ clock?”
The devil looked confused for a moment and he started to check all the clocks. “They should all be here,” he muttered, looking frantically, “It has to be here somewhere.”
Suddenly the devil relaxed, slapped himself on the forehead and exclaimed, “Oh, yes! How silly of me. We keep that clock in the workshop and use it as a fan.”
Copyright Ó K P Bonney & Co LLP 2004. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publishers.
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