"From 6th April the government have proposed to change childcare voucher legislation for higher rate-tax payers. Under the new rules of the scheme higher rate taxpayers will only be eligible to recieve £28 per week in childcare vouchers. Basic rate taxpayers will still be eligible to receive the maximum allowance of £55 per week."

Why are the changes taking place?

At present, higher rate taxpayers benefit from double the amount of income tax relief - and individuals who are paying the new %50 tax rate from April 2010 will benefit even more. HMRC are introducing these reforms so that all recipients of directly supported childcare and childcare vouchers receive approximately the same level of income tax exemption of £11 per week.

Existing Scheme Members

Existing scheme members and employees who sign up before 6th April 2011 will remain unaffacted by the changes provided that they remain with the same employer and they maintain a continuous voucher order. In the event of an empoyee wanting to take a break from the scheme it may be advisable for them to temporarily reduce their voucher requirement to a nominal amount to maintain continuity on the scheme. Currently clarification is being sought on the issue.

Key Points

• Existing scheme members and people who join the childcare vouchers scheme before April 6th 2011 will be unaffected by the change (irrespective of their tax band) providing they stay with their existing employer and maintain a continuous voucher order.
• High rate taxpayers (40%) who join the scheme from April 6th 2011 will only be eligible to recieve £28 per week in childcare vouchers.
• Addition rate taxpayers (50%) who join the scheme from April 6th 2011 will only be eligible to recieve £22 per week in childcare vouchers.
• Basic rate taxpayers who join the scheme from April 6th 2011 will be unaffected by the change.
• All employees joining the scheme from April 6th 2011 will have an earnings assesment by their employer in order to calculate their childcare voucher entitlement. This assesment will need to be repeated at the start of each tax year.

Information for Employers

• Employers will be required at the beginning of each tax year and as each new employee registers onto the child vouchers scheme to estimate the level of basic employment earnings that new scheme members are likely to recieve during that year. Overtime payments and bonuses can be ignored but guarenteed bonuses must be included.
• If the childcare vouchers via a salary sacrifice scheme then the earnings assesment will be based on post sacrifice earnings. For the 2010-2011 tax year, new scheme members who estimated earnings exceed £43,875 will be affected by new legislation.
• If an employee's earnings change during the year the employee is still only entitled to recieve the amount of vouchers agreed at the assesment they recieved at the start of the tax year or when they joined the scheme. The amount of childcare vouchers the employee is entitled to recieve can only be changed from the start of the next tax year. This rule applies equally to salaries that have increased or decreased for whatever reason. However, if the employer gets the original assesment wrong then the employer should inform HMRC of the taxable benefit using the normal procedure - P11D.
• We are awaiting confirmation about scheme members who register for the scheme prior to 6th April 2011 but whose first salary deduction is in April 2011. Based on initial discussions with HMRC it is expected that these employees will be able to take the full £243 per month allowance as long as evidence is held that the agreement was signed prior to 6th April 2011.
• Employers currently save £373 a year in National Insurance contributions per employee on the childcare vouchers scheme. After the new legislation takes place this saving will be reduced to a maximum £190 a year per new scheme member whose entitlement has been restricted to £28 per week. In light of this is would be beneficial for employers to prepare for the changeover by encouraging their employees to sign up to the scheme before the 6th April 2011 deadline. To assist in this matter Fideliti will be providing extra marketing material to try to ensure maximum take up before the deadline.

PDF version of this news item

Download this news release in pdf format >> New Childcare Voucher Legislation for April 2011

Technical Guidance

Current technical guidance can be found here

Further technical guidance be be obtained by emailing : pa.harris@hmrc.gsi.gov.uk

More information is expected following the comprehensive spending review which takes place towards the end of October 2010. Fideliti will of course keep all of its customers informed as new information becomes available.