Pre 6 April 2011 members
For those pre existing members they will continue to benefit from the £55 per week (£243 per month) tax and NIC exemption for childcare vouchers. If the value of vouchers provided to employees exceeds these figures then any excess must be reported on forms P11D and Class 1 NICs must be paid
Post 6 April 2011 members
This is where the situation becomes more interesting and is more involved from a payroll perspective. From 6 April 2011 new scheme members have an allowance that is tied to their marginal rates of tax. Higher rate tax payers (40% or 50%) effectively have their childcare allowances restricted so that no-one benefits by more than the amount a basic rate tax payer saves in pure monteray terms.
So employees in each tax band receive a different rate of childcare voucher
To work out the value of the tax and NI free vouchers employers need to undertake a Basic Earnings Assessment (BEA) each year. The BEA is an annual exercise to forecast which value of vouchers an employee is entitled to.
While an individuals actual marginal rate of tax will not be known until the end of the tax year the employer must make a forecast at the start of each tax year to work out the value of the vouchers the employee is entitled to. This forecast / assessment applies for the whole of the tax year too.
The BEA is not a look back at previous information (so the P60 or P45 is not relevant) and neither is it a look forward to known issues (a fortchoming redundancy for example). The BEA assesses an individuals current contractual circumstances to identify an employees "Relevant Earnings Amount"
This amount is calculated and should included all payments due under the employee's contract of employment, but not any discretionary payments. For example:
- Basic pay or salary
- Guaranteed overtime that is paid whether or not it is worked (but not overtime that is only paid if it is worked)
- Shift allowances
- Guaranteed bonuses (but not performance-related or discretionary bonuses)
- Contractual commissions
- Londonweighting or other regional allowances
- Qualification payments, e.g. first-aid allowance
- The P11D value of any taxable benefits which the employer has agreed to provide the employee (medical insurance, car etc)
Amount that are exluded from the computation may include
- Occupational pension contributions
- Payroll giving donations deducted from gross pay under the net pay arrangement
- Expenses payments that are included in the payments above but that may be paid without deduction of tax
- Relocation-related removal expenses that are taxable earnings from the employment (up to £8,000)
- Where Earnings and Benefits total less than £150,000, the amount of any allowance under Part 3 of [the Income Tax Act 2007] to which the employee is shown to be entitled in the code determined in accordance with PAYE regulations for use by the employer in respect of the employee for the tax year, namely
- the personal allowance (under age 65)
- the personal allowance (age 65 to 74) (reduced as appropriate where earnings exceed the income limit)
- the personal allowance (age 75 and over) (reduced as appropriate where earnings exceed the income limit)
- the blind person's allowance
So you have the Relevant Earnings, now what is the marginal rate of tax?
For 2012/13 there are two key bands that you need to consider:
- Basic rate limit at £34,370
- Higher rate limit at £150,000
Armed with this information you can calculate the value of the vouchers allowable. These are
- £22 per week / £97 per month with 'relevant earnings amount' > £150,000 that is estimated to exceed the Higher rate limit for the tax year,
- £28 per week / £124 per month with 'relevant earnings amount' > £34,370 but < £150,000
- £55 per week / £243 per month with a 'relevant earnings amount' below the Basic rate limit of £34,370
Other key points to note are that you must keep a record of how you arrive at the Basic Earnings Assessment although there is no specific prescribed format
You can obtain further information from the HMRC website Employer-Supported Childcare Guidance and FAQs.