Can my company claim tax relief on my childcare costs?
If you run your own limited company, it's possible to fund your childcare costs directly from the company's bank account. If structured correctly, your company will be able to claim tax relief on your childcare costs and any payments made on your behalf will not be subject to tax and national insurance on you personally.
There are two ways your company can do this, either through a voucher scheme or through a direct agreement with the provider. We discuss these options later on in this post, however there are a number of criteria that need to be satisfied in order to qualify for the tax relief.
What are the conditions that need to be met in order for my company to claim tax relief for childcare costs?
In order to qualify for the tax deduction the following conditions need to be met:
- Childcare assistance must be provided through a registered childcare provider
- You must be the parent, legal guardian or have parental responsibility for the child in question – so you can’t claim for your grandchildren’s or nephew’s childcare costs
- You can only claim assistance up until the 1st of September after your child’s 15th birthday (or 16th birthday if they are registered disabled). So for example, John’s son Elias was 15 on 1 October 2016. Therefore John’s company Reece Ltd can claim a tax deduction for any childcare costs incurred up until 1 September 2017.
- If the childcare provider is related to your child, then they must be registered, approved and run a legitimate childcare business which also cares for other unrelated children.
The following childcare costs will not qualify for the tax and National Insurance Contribution exemptions:
- Any cash payments made to you for your childcare costs
- Paying your childcare bills when invoices are issued in your name rather than that of your company
- Payments made for your children’s school fees
- Payments made under the childcare scheme which do not meet the qualifying criteria (see above)
Some examples of childcare costs which do qualify for tax relief are as follows:
- Payments for registered childminders, play schemes and nurseries
- Out-of-hours clubs which are run on school premises by a school or local authority
- Childcare schemes run by approved providers
What kind of records does my company need to keep for this expenditure?
You’ll need to keep full records to demonstrate that all the conditions have been met, which should include:
- The name of your child and their date of birth
- Full details of your childcare provider, including their registration or approval number
- The expiry date of their approval
So how do I get my company to pay for childcare costs in practice?
There are really only two ways that this can be done - either via a voucher scheme or by getting your company to contract directly with a childcare provider.
The childcare voucher scheme involves the purchase of vouchers through one of the recognised scheme providers such as Kiddivouchers, Edenred and Faircare. These can be used to pay a registered provider for childcare, who can then claim back the fees from your voucher issuer. There is usually an administration fee of between 2 and 5% which is paid to the voucher provider.
If it’s just you (and your spouse) running your own company then a more practical alternative is that your company pays a registered childcare provider directly for childcare. This can be done through a relatively simple process of setting out the agreement between you and your company setting out the amount that your company is willing to spend on childcare on your behalf.
Whichever option you decide to pick, the childcare fees must be paid directly from company’s business bank account.
How much childcare can your company provide for?
Your company can pay for as much childcare as you choose, however you will be liable to tax and National Insurance if you exceed the published limits.
If you're joining a childcare scheme now, then the amount of childcare that you can be paid and which will qualify for tax relief depends on something called your basic earnings assessment.
What is the basic earnings assessment?
Before paying for any childcare on your behalf, the company will need to carry out a basic earnings assessment. This will be carried out at the point where you join the scheme and then annually at the start of every tax year. The basic earnings assessment then applies for the whole of that tax year based on the information available - it cannot be based on your previous year’s earnings.
What earnings and benefits are included in the basic earnings assessment?
The following earnings are included:
- Basic pay
- Bonuses, if contractual or agreed
- Regional allowances such as London weighting
- Taxable benefits
- Shift allowances
What income is excluded from the basic earnings assessment?
The following earnings are excluded:
- Performance related bonuses or those which are discretional
- Payments for overtime
- Benefits which are already exempt from tax such as pension contributions
Are dividends included in the basic earnings assessment?
HMRC guidance is not clear on this point, however it’s reasonable to assume that they are not included in the calculation because they are generally not considered to be a form of remuneration.
Any change to your earnings over the course of the year will not change the allowance you have for childcare in the current year, but it may affect your future allowance when the assessment is done at the start of the next tax year.
What happens if I get the basic earnings assessment wrong?
If you make a genuine mistake in your assessment based on the best information available to you at the time it was carried out, then it will still be considered valid for the twelve month period for which it is intended to apply. HMRC will consider any exempt figures based on this assessment as correct for the purposes of completing the P11D.
If you get the basic earnings assessment wrong because you failed to take into account the information you had available at the time, meaning you benefit from a level of relief to which they were not entitled, then HMRC can assess for any additional tax that is due. You can also declare any additional relief that has been received by submitting details on the P11D form
What are the record keeping requirements for a basic earnings assessment?
HMRC requires you to keep full and detailed records of your basic earnings assessment calculations, because although they do not need to be sent to the department, they will expect them to be available to them if they ask.
There is no set format for these records but they need to include the details that were used to calculate the basic earnings assessment. HMRC’s employer compliance work will usually involve checking this information, so it is important to ensure that these records are clear.
What are the tax and NIC exempt amounts that can be paid by my company?
Once you've completed a basic earnings assessment (see above), the next step is to obtain how much you can provide under the tax/NIC exemption. This will depend on the results of your assessment and whether you are a basic, higher rate or additional rate tax payer.
The exempt thresholds are as follows:
Rate of income tax
Weekly exempt limit
Monthly exempt limit
Annual exempt limit
If you'd like any other help on what you can and can't claim for business, feel free to get in touch.