Small companies
– a simple guide to tax-efficient childcare vouchers

Introduction

1. The legislation on childcare vouchers applies to a small company whose only employees are either just its controlling directors or its controlling directors and other employees in exactly the same way as it applies to a large company with hundreds of employees.
2. In particular, the tax advantages for a small company and its employees are the same as for any employer. Vouchers, up to the maxima permissible by reference to the employee’s marginal tax rate, are
   1. tax-free and NI-free for employees (including directors)
   2. exempt from employer’s NICs
   3. like the cost of buying the Abacus Solution, tax deductible for the company.

“Free vouchers”

3. However, a small company may wish to set up a scheme that allows certain employees, for example its controlling directors, to be given childcare vouchers without their needing to sacrifice salary - even though other employees will need to agree to sacrifice salary in exchange for vouchers. In this note, we use the term “free vouchers” to mean tax-efficient childcare vouchers given to a director or other employee without salary sacrifice on the part of the recipient. Free vouchers are also sometimes referred to as “salary plus” vouchers, but this can be misleading where an employee is receiving vouchers but not receiving any salary.

The basics

4. This note covers all that is needed if the company is going to give free vouchers to some of its employees. However, the executive responsible for the scheme can read Abacus’s publication entitled Employer’s Guide to Self-Operated Scheme to obtain background information. If there are other employees who choose to take vouchers via salary sacrifice then other Abacus documents will be needed. These are referred to below.

Communication

5. The company must observe the tax rule that requires childcare vouchers to be available to any employee who wants them. This can be achieved by a brief note being sent
   • To all employees, however unlikely they are to have the slightest interest in childcare, to introduce the scheme,
   • To employees who join the company after the introduction of the scheme (unless there is a reference to the scheme in a staff handbook).
6. This note, on the company’s letterhead, could be along the lines
   “To all employees
   The company offers childcare vouchers to eligible employees. We use the scheme promoted by Abacus Voucher Solutions. For an outline, please visit its website, www.abacusvouchers.co.uk. Full details of the company’s scheme can be obtained from the undersigned.”
7. The company should keep copies of the notes on its file relating to childcare vouchers.

Salary sacrifice

8. If there are one or more employees from whom salary sacrifice is required by the company in exchange for vouchers, the company should follow the guidance provided in the Employer’s Guide. This will include giving each such employee the relevant version of the Employees’ Guide.

Basic earnings assessment

9. For every employee joining a voucher scheme after 5 April 2011 there must be a Basic Earnings Assessment, either the long form version or the short form version, as described in the Employer’s Guide. This is intended as the means by which the employer determines the maximum value of vouchers that may be provided tax- and NI-free, the policy of the government being that higher rate (40%) and additional rate (50%) taxpayers should enjoy no more tax relief than a basic rate (20%) taxpayer. However, the way in which the legislation has been framed means that to establish whether an intending participant in a scheme is liable to tax at more than the basic rate the employer disregards the employee’s income from any other source and counts as remuneration from the employer only the contractual entitlement to pay and benefits. From this it follows that if, as is commonly the case with a very small company, the directors have no contractual entitlement to pay because their practice is to take out of the business either dividends or an annual bonus based on the company’s results, they may well be entitled to be regarded for voucher purposes as basic rate taxpayers and thus to take vouchers to the value of £2,916pa tax-free even though their dividends or bonus from the company makes them liable to tax at the margin at the rate of 40% or 50%.

Applications for vouchers

10. Any employee, including a director, who wants vouchers must apply to the company by signing a form that will enable the company to demonstrate to HM Revenue & Customs, should it be called upon to do so, that its scheme is being operated within the tax rules. Employees making salary sacrifice should complete the Employment Contract Variation Request as mentioned in the Employer’s Guide. Employees who are to receive free vouchers should complete a form of Childcare Vouchers Award Acknowledgement available as a pro forma from Abacus (not on Abacus’s website but available on request by email). Irrespective of the form used, it must be accompanied by the Basic Earnings Assessment, completed by the employee and then countersigned by the employer to show that it has been adopted by the employer as the party who by law is responsible for its correctness.

“Backdating” vouchers

11. An employee can obtain the full annual entitlement to childcare vouchers in a compacted period (e.g. over three months or even in one month). The qualifying conditions must be met for all of the weeks or months for which vouchers are to be issued. So if an initial voucher is to be issued for all the months for which vouchers could have been issued since the start of the current tax year, there must have been a qualifying child at the start of the tax year and the employee must have been on the employer’s payroll at the start of the tax year.
12. Where the provision of childcare vouchers is subject to a salary sacrifice agreement the salary to be sacrificed must be sufficient to cover the value of vouchers being issued. This is because salary sacrifice agreements cannot be retrospective. Therefore if in the final month of the tax year (March) an employee wants to receive 12 x £243 in childcare vouchers under a salary sacrifice, and always assuming that the Basic Earnings Assessment does not predict a liability to tax at more than the basic rate, the pay to be given up in that month would need to be at least £2,916. An employee who will be sacrificing salary and wishing to apply for an initial “backdated” voucher should complete a variant of the form of Employment Contract Variation Request available as a pro forma from Abacus (not on Abacus’s website but available on request by email).

Arrangement with childcarer(s)

13. Whichever arrangement applies, sacrifice or free vouchers, it will be important to ensure that the scheme complies with the tax rules. To achieve this
    • the childcarer should have the benefit of Abacus’s publication called Childcarer’s Guide to Childcare Vouchers
    • the childcarer should complete the form of Childcarer’s Registration Request addressed to your company as the employer of the parent whose child is to have his or her fees paid (or paid partly) by vouchers
    • the Childcarer’s Guide to Childcare Vouchers may need to be modified if your company is not accustomed to making payment by electronic funds transfers, ie normally prefers to pay its suppliers by cheque.
14. We recommend that if two employees who are spouses or partners are to receive vouchers, their child’s childcarer should complete two forms of Childcarer’s Registration Request, albeit the second form need not repeat some of the details the carer will have given in the first form.
15. Once your company has received the Childcarer’s Registration Request(s), your company should
    • record the childcarer in its database for the purposes of electronic funds transfers (if that is how your company pays its suppliers) or
    • if your company normally makes payments to its suppliers by cheque, set up a prompt to make a regular payment or give its bank a standing order. 

You will then need to make sure that month by month the value of the virtual voucher issued to the employees participating in the scheme is duly remitted to the carer.  It is absolutely essential that the payment be made by the company to the carer without the payment passing through the hands of the employee. 

If you’re in doubt about anything, call Abacus on 0845 257 0046.  Or use our contact form.