With tax returns for 2009/2010 done and dusted, it’s time for employers to reflect on whether they are remunerating their staff in the most tax-efficient way. As the economic climate continues to hit SMEs and their staff alike - but it's a race against the clock for employers wanting to get maximum benefit from the salary sacrifice arrangement in favour of childcare provisions.
Employers who have not yet introduced a childcare scheme have until 5 April 2011 to do so. Employees must join the scheme by the same date, so that higher-rate and additional-rate taxpayers can continue to benefit from the maximum tax relief available. And late-comers will be punished too: employees joining a scheme after this date will only be entitled to basic rate tax relief.
It is currently possible to offer employees childcare or childcare vouchers of up to £55 per week without an income tax or national insurance charge arising. However legislation will be introduced in April 2011 to restrict the level of income tax relief for employer-supported childcare to higher-rate and additional-rate taxpayers so that it matches the amount available to basic rate taxpayers. Employees taxed at the higher rate (40%) and additional rate (50%) will have their weekly allowable reliefs capped at £28 and £22 respectively so that the maximum relief for all taxpayers is no more that the basic rate of 20% on £55, i.e. £11 per week.
These restrictions will only apply to individuals who join a scheme on or after 6 April 2011, so employers should consider implementing schemes before then to ensure employees continue to benefit from the 40% or 50% tax relief which is currently available. Where schemes are already in place, it is the right time to communicate the changes to your employees in case there are some who haven’t yet joined but are considering doing so. Regrettably, expectant parents on your workforce cannot best the changes by signing up for the scheme before the baby is born.
Where employees join the scheme after 5 April 2011, employers will be responsible for assessing the appropriate level of tax relief allowable on the childcare provision. They must carry out a basic earnings assessment when the employee joins the scheme and again at the start of each tax year. This assessment must include basic pay, contractual or guaranteed bonuses, regional allowances, taxable benefits and shift allowances but will exclude performance related or discretionary bonuses, overtime pay or any earnings or benefits that are exempt from tax such as pension contributions. Where a new employee joins the company, their earnings from joining will be pro-rated to arrive at a notional annual figure.
Once in place at the start of the tax year, this assessment is set in stone for that year, and will not be adjusted for changes to income during the tax year. The basic earnings assessment for the employee will determine the amount of exempt income in the form of childcare vouchers that the employee can receive depending on whether this falls within the 20%, 40% or 50% tax band.
These changes bring about further increases in tax and NIC payments, and seem like a lot of work for employers. Employers should act now to preserve the full relief currently available to employees beyond 5 April 2011 by setting up schemes in time to allow employees to join ahead of the change.
Mark Collins is head of employers consulting group at Baker Tilly