Childcare schemes for contractors – how do they work and what are you entitled to?
In this article, Patrick Gribben, Head of Client Services from Intouch Accounting demystifies the two available schemes and what they mean for you.
Tax-free childcare – post October 2018
If you were to apply to the government for childcare relief now, you’d automatically default to the new scheme. For every £8 you pay to a childcare provider via your online account, the government will pay a further £2 – up to the value of £2,000. However, if you or your partner earns more than £100,000 you will not be eligible for this scheme.
As a contractor, it is your responsibility to organise your childcare tax relief, with no involvement from your limited company.
In order to qualify for the Tax-Free Childcare Scheme, you must:
- have parental responsibility for the child you are claiming care for.
- be using registered and approved nurseries, childminders, creche facilities, play schemes, out-of-hours clubs run by schools or local authorities.
- use a registered childcare provider which runs an approved business that offers childcare to other children as well as your own, even if you’re using a relative.
- be aware that any payments made outside of the childcare scheme won’t qualify for tax and NI exemptions. This includes any cash paid to employees to cover childcare costs, and invoices issued in the employee’s name but paid for by the company.
- have a child under the age of 15 to qualify, or 16 if the child is disabled.
You can find out more about the Tax-Free Childcare scheme here.
Childcare Scheme prior to October 2018
If you signed up to a childcare scheme prior to October 2018 you are still entitled to use it, as long as the employer continues to run the scheme and you are still the employee.
In this instance, the limited company would pay the childcare provider the costs on behalf of the employee, and the amount which is paid to the childcare provider is written into an agreement with the employer (your limited company) and employee.
If you joined the scheme prior to 6 April 2011, the company could contribute a further £55 per week / £243 per month, which is exempt from income tax and national insurance. It would continue to gain corporation tax relief through the company.
If you joined the scheme after this date, the amount you are able to contribute depends on whether you are a basic, higher or additional rate taxpayer:
Basic rate taxpayers: £55 / week – £243 / month
Higher rate taxpayers: £28 / week – £124 / month
Additional rate taxpayers: £25 / week – £110 / month
Any direct agreement after the 5th October 2018 will be declarable on the P11d and treated as an employment benefit.
Childcare and tax can be confusing, that’s why it’s much simpler to put your trust in a specialist contractor accountant and have them advise you based on your personal circumstances.