The provision of childcare facilities for children of employees, generally, gives rise to a taxable benefit.? However, Section 318A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) allowed a tax exemption on employer-supported childcare provision.? This affected employers who directly-contract to provide childcare or, more commonly, operate a childcare voucher scheme.? The tax exemption value was set as ?50.00 per week for tax year 2005/06, increasing to ?55.00 per week from 06 April 2006.
From 06 April 2011, Section 318A was amended by the insertion of Section 318AA into the ITEPA 2003, courtesy of the Finance Act 2011.? Section 318AA restricts the level of tax relief to employees who join directly-contracted or childcare voucher schemes on or after 06 April 2011.? The change ensured that the available tax relief is now aligned to the Basic rate of tax, regardless of whether the employee pays tax at the Higher or Additional rate.? Employers now have to perform the Basic Earnings Assessment (BEA) to ascertain the employee?s expected marginal rate in the tax year and then apply the following maximum thresholds:
| Weekly | Maximum | Tax Relief |
| Basic Rate | ?55.00 | ?11.00 (i.e. ?55 * 20%) |
| Higher Rate | ?28.00 | ?11.20 (i.e. ?55 * 40%) |
| Additional Rate | ?22.00 | ?11.00 (i.e. ?55 * 50%) |
These weekly figures result in monthly and annual thresholds that employers should be operating, expressed as follows:
| Pay?Frequency | Basic Rate Maximum | Higher Rate Maximum | Additional Rate Maximum |
| Weekly | ?55.00 | ?28.00 | ?22.00 |
| Monthly | ?243.00 | ?124.00 | ?97.00 |
| Annual | ?2,915.00 | ?1,484.00 | ?1,166.00 |
As a result of the reduction to the Additional rate from 50% to 45% from April 2013, the Finance Bill 2013 will amend Section 318AA to increase the weekly threshold for these taxpayers to from ?22.00 to ?25.00 per week (i.e. ?25.00 * 45%).? The revision to the rates will ensure that these taxpayers continue to receive the benefit of tax relief at the Basic rate.? 2013/14 rates can be expressed as follows:
| Pay?Frequency | Basic Rate Maximum | Higher Rate Maximum | Additional Rate Maximum |
| Weekly | ?55.00 | ?28.00 | ?25.00 |
| Monthly | ?243.00 | ?124.00 | ?110.00 |
| Annual | ?2,915.00 | ?1,484.00 | ??1,325.00 |
Comment
Note that this does not affect employer-provided childcare, i.e. workplace nurseries, where the current exemption remains unchanged.? The term ?tax relief? also applies to relief from National Insurance Contributions and, in this regard, the Finance Bill 2013 will introduce secondary Social Security legislation to align the two tax regimes.
These changes will apply from 06 April 2013 to employees who joined such a scheme on or after 06 April 2011.? Payroll systems, processes and internal literature may need to be updated as a result of these changes.
Further Information
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Source: http://www.payroll-help.com/2013/01/11586-employer-supported-childcare/
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