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Female partner is main breadwinner
Female partner is main breadwinner
Small company case study
Jill and Jack are a couple out of the big company rat race. Jill is a pensions specialist. Jack has a part time job and is also studying for a degree.
Insurance against professional negligence would be very expensive for Jill. For some years she has therefore made her services available through a company, Happy Advice Limited. Jill and Jack own all the shares in Happy Advice Limited. Jill is the only director of Happy Advice Limited, and Happy Advice Limited has no other staff. Most of the time Jill is out and about, meeting clients at their own premises, but she also works in an office at home. Jack’s part-time job is at the local community centre, where he earns about £7,500 a year. When both Jill and Jack are out of the house at the same time, telephone callers are greeted by an answering machine. Otherwise, Jack answers the phone, taking messages and booking appointments for Jill to meet clients. Jack also does the bookkeeping, including VAT returns, for Happy Advice Limited.
Jill is good at what she does. The business is therefore successful. On her accountant’s advice, Jill and Jack take regular dividends from Happy Advice Limited. These amount to about £75,000 a year for Jill and £25,000 for Jack. Jill also arranges that Happy Advice Limited pay her a small salary of £7,200 – an annual amount just below the threshold for liability to national insurance contributions.
Jill’s and Jack’s first child, Fred, was born last March. It is now December. Jack has been looking after Fred since Jill’s resumption of her work quite soon after Fred’s birth, but he now wants to concentrate harder on his studies, using resources in the college library. So the couple needs a nursery that will look after Fred whilst Jill is at work and Jack is at college. The childcare, for three days each week, is going to cost £600 a month.
Just for once, Jill takes advice rather than gives it. Abacus Voucher Solutions recommends that Jill appoint Jack as company secretary of Happy Advice Limited at a salary of £620 per month and that she arrange for Happy Advice Limited to give both her and Jack childcare vouchers in addition to their remuneration and any other benefits they receive from Happy Advice Limited. Because Jill's taxable remuneration (including the value of her company car) is less than £42,475, the company can award her childcare vouchers to the value of £243 each month. Happy Advice Limited can do the same for Jack. For Happy Advice Limited, these are legitimate business expenses, amounting to 2 x £243 x 12 = £5,832 allowable in its annual corporation tax computation.
Although Jill is a 40% taxpayer in relation to her overall income, meaning she would also have to pay 2% in NI if she were receiving a salary from Happy Advice Limited rather than dividends, she will not have to pay any tax or NI on the annual value of the vouchers issued to her (£2,916), so she will make an annual saving of £2,916 x 42% = £1,225. Jack has some building society savings and the earnings from his part time job that make him a 20% taxpayer. He would have to pay NI at 12% if he were receiving a salary of £243 per month in addition to the £620 monthly. But he will not have to pay tax or NI on the value of his vouchers, so he will make a saving of £2,916 x 32% = £933. As a family unit, Jill and Jack will now have vouchers worth £5,832, almost the full annual cost of Fred’s child care, and have saved tax of £2,158. Jill notes with satisfaction that if she were having to pay £5,832 out of taxed income, that income would need to be £5,832 ÷ 0.58 = £10,055.
Jill and Jack recognise that childcare vouchers are a no-brainer for them. Aware of the need to ensure Happy Advice Limited will not be vulnerable to attack by the tax man, Jack registers on the Abacus Voucher Solutions website to view the formal documentation Happy Advice Limited will need to ensure its childcare vouchers scheme is set up properly. Jack discovers that setting up a scheme is really very straightforward and decides that Happy Advice Limited should buy the Abacus Childcare Voucher solution.
Jack puts Fred to bed early one evening to give himself 20 minutes undisturbed at his computer so that he can customise the documents downloaded from the Abacus website. In completing the drafts, Jack takes advantage of the opportunity for Happy Advice Limited to ‘backdate’ vouchers to the start of the tax year. This means that initially Happy Advice Limited will be holding a balance representing unused but available vouchers that can be drawn on if the family’s childcare costs increase later. Jack points out to Jill that this is quite likely, because they are planning to have another child, and in any case they intend that once Fred is three years old he will attend the local independent school, which accepts childcare vouchers in part payment of the fees for children until they attain age 5.
(If Jill were a self employed consultant, she would not be eligible for tax-exempt childcare vouchers – although she could employ Jack, and as an expense of her business allowable against her profits for income tax purposes give Jack vouchers. This could not however be done if Jill were to make Jack her partner in her business.)
Jill finds it increasingly tiring to be driving herself all over the country on the business of Happy Advice Limited. She plans that next year Happy Advice Limited will engage its first employee at arm’s length, a chauffeur. Jill already has her friend Amy, mother of a toddler, in mind for the job. They agree on pay for Amy of £20,000 pa, and Jack is careful, because it’s an important requirement for preserving tax benefits, to ensure Amy is informed that Happy Advice Limited has a childcare vouchers scheme. When Amy joins Happy Advice Limited, she asks Jack if Happy Advice Limited will agree that she may sacrifice salary of £2,916 and receive childcare vouchers instead. On Happy Advice Limited’s behalf, Jack is glad to agree to Amy’s request, not only because it will help Amy by saving her tax and NI of £933 pa but also because it will save Happy Advice Limited employer’s NI at 13.8% = £402 pa.
Over supper, Jack remarks to Jill that childcare vouchers are a boon, and with the help of Abacus Voucher Solutions simple to set up and administer. Jill confesses she didn’t previously know very much about childcare vouchers and asks who invented them. “Do you really not know?” exclaims Jack. “It was Gordon Brown.”
All characters and Happy Advice Limited are fictional and are not designed to have any resemblance to persons living or dead. This case study is designed to illustrate how childcare vouchers can be used tax efficiently by small limited companies, but it does not constitute legal advice.
Male partner is main breadwinner
SMALL COMPANY CASE STUDY
Fred is a consultant. Insurance against professional negligence would be very expensive. For some years he has therefore made his services available through a company, Happy Advice Limited. Fred and his wife Amy own all the shares in Happy Advice Limited. Fred is the only director of Happy Advice Limited, and Happy Advice Limited has no other staff. Most of the time Fred is out and about, meeting clients at their own premises, but he also works in an office at home. Fred’s wife Amy has a part-time job at the local community centre, earning about £7,500 a year. When both Fred and Amy are out of the house at the same time, telephone callers are greeted by an answering machine. Otherwise, Amy answers the phone, taking messages and booking appointments for Fred to meet clients. Amy also does the bookkeeping, including VAT returns, for Happy Advice Limited.
Fred’s is good at what he does. The business is therefore successful. On his accountant’s advice, Fred and Amy take regular dividends from Happy Advice Limited. These amount to about £75,000 a year for Fred and £25,000 for Amy. Fred also arranges that Happy Advice Limited pay him a small salary of £7,200 – an annual amount just below the threshold for liability to national insurance contributions.
Fred’s and Amy’s first child, Jack, was born last March. It is now December, and Amy will be going back to her part time job in January. From then on, therefore, the couple will need a nursery that will look after Jack whilst Amy is at work. The childcare, for three days each week, is going to cost £600 a month.
Just for once, Fred takes advice rather than gives it. Abacus Voucher Solutions recommends that Fred appoint Amy as company secretary of Happy Advice Limited at a salary of £620 per month and that he arrange for Happy Advice Limited to give both him and Amy childcare vouchers in addition to their remuneration and any other benefits they receive from Happy Advice Limited. Because Fred's taxable remuneration (including the value of his company car) is less than £42,475, the company can award him childcare vouchers to the value of £243 each month. Happy Advice Limited can do the same for Amy. For Happy Advice Limited, these are legitimate business expenses, amounting to 2 x £243 x 12 = £5,832 allowable in its annual corporation tax computation.
Although Fred is a 40% taxpayer in relation to his overall income, meaning he would also have to pay 2% in NI if he were receiving a salary from Happy Advice Limited rather than dividends, he will not have to pay any tax or NI on the annual value of the vouchers issued to him (£2,916), so he will make an annual saving of £2,916 x 42% = £1,225. Amy has some building society savings and the earnings from her part time job that make her a 20% taxpayer. She would have to pay NI at 12% if she were receiving a salary of £243 per month in addition to the £620 monthly. But she will not have to pay tax or NI on the value of her vouchers, so she will make a saving of £2,916 x 32% = £933. As a family unit, Fred and Amy will now have vouchers worth £5,832, almost the full annual cost of Jack’s child care, and have saved tax of £2,158. Fred notes with satisfaction that if he were having to pay £5,832 out of taxed income, that income would need to be £5,832 ÷ 0.58 = £10,055.
Fred and Amy recognise that childcare vouchers are a no-brainer for them. Aware of the need to ensure Happy Advice Limited will not be vulnerable to attack by the tax man, Amy registers on the Abacus Voucher Solutions website to view the formal documentation Happy Advice Limited will need to ensure its childcare vouchers scheme is set up properly. Amy discovers that setting up a scheme is really very straightforward.
Amy notes that for a employers with fewer than 11 employees, the annual fee charged by Abacus is only £110 plus VAT. She decides that Happy Advice Limited should buy the Abacus Childcare Voucher Solution.
Equipped with the essential documents, Amy puts Jack to bed early one evening to give herself 20 minutes undisturbed at her computer so that she may customise the documents downloaded from the Abacus website. In completing the drafts, Amy takes advantage of the opportunity for Happy Advice Limited to ‘backdate’ vouchers to the start of the tax year. This means that initially Happy Advice Limited will be holding a balance representing unused but available vouchers that can be drawn on if the family’s childcare costs increase later. Amy points out to Fred that this is quite likely, because they are planning to have another child, and in any case they intend that once Jack is three years old he will attend the local independent school, which accepts childcare vouchers in part payment of the fees for children until they attain age 5.
(If Fred were a self employed consultant, he would not be eligible for tax-exempt childcare vouchers – although he could employ Amy, and as an expense of his business allowable against his profits for income tax purposes give Amy vouchers. This could not however be done if Fred were to make Amy his partner in his business.)
Fred finds it increasingly tiring to be driving himself all over the country on the business of Happy Advice Limited. He plans that next year Happy Advice Limited will engage its first employee at arm’s length, a chauffeur. Fred already has his friend George, father of a toddler, in mind for the job. They agree on pay for George of £20,000 pa, and Amy is careful, because it’s an important requirement for preserving tax benefits, to ensure George is informed that Happy Advice Limited has a childcare vouchers scheme. When George joins Happy Advice Limited, he asks Amy if Happy Advice Limited will agree that he may sacrifice salary of £2,916 and receive childcare vouchers instead. On Happy Advice Limited’s behalf, Amy agrees to George’s request, not only because it will help George by saving him tax and NI of £933 pa but also because it will save Happy Advice Limited employer’s NI at 13.8% = £402 pa.
Over supper, Amy remarks to Fred that childcare vouchers are a boon, and with the help of Abacus Voucher Solutions simple to set up and administer. Fred confesses he didn’t previously know very much about childcare vouchers and asks who invented them. “You really are an ignoramus,” exclaims Amy. “I thought everybody knew that. It was Gordon Brown.”
All characters and Happy Advice Limited are fictional and are not designed to have any resemblance to persons living or dead. This case study is designed to illustrate how childcare vouchers can be used tax efficiently by small limited companies, but it does not constitute legal advice.