Employers paying for childcare

A recent survey by the National Centre for Social Research highlights that the relaxation, in 2005, of the previously stringent rules for tax relief on childcare costs remains largely unappreciated by those businesses without HR departments. The NCRS research indicates that less than 3% of employers offer to pay for childcare.

The current rules allow for an employee (including a director) to benefit from up to £55 per week without incurring any liability to income tax or national insurance contributions (for payments exceeding this threshold, the excess is taxable under PAYE in the usual fashion).

Childcare includes care provided by registered childminders, nurseries, play schemes and after-hours clubs to children of up to 15 years of age. Importantly, there no longer remains a requirement for the care to be provided on the employer's own premises.

The cost of the childcare must be contracted for directly between the employer and the provider, or met via the provision of a voucher by the employer (the voucher can take any form and is, in essence, nothing more than a promissory note). The cost cannot be incurred by the employee and subsequently reimbursed by the employer if the £55 per week exemption is to apply.

An employee to whom the exemption could be relevant should consider seeking a salary sacrifice arrangement from his or her employer. For those working for their own company, the use of the childcare exemption rules should prove an efficient route for the extraction of profit, whether with a salary (or dividend) sacrifice or not.

There is no equivalent relief available to the self employed, but with the potential savings being especially worthwhile for the hard pressed couple running both a small business and a young family, incorporation might be considered.