Employer Supported Childcare

mployer Supported Childcare: Tax Implications for Employers and Employees

Employer Supported Childcare (ESC), especially through childcare vouchers, has long been a popular benefit. Although the scheme closed to new entrants in 2018, existing members can still benefit from its tax and NIC exemptions. AHACCOUNTANTS can assist businesses in Nottingham with advice on how to navigate the remaining aspects of ESC and the newer Tax-Free Childcare (TFC) scheme.

Employer Supported Childcare (ESC) Overview

ESC was an effective way for both employers and employees to save on tax and national insurance. Under the scheme, employers provided childcare directly or through vouchers, which were exempt from tax and NICs up to certain limits.

Key Points on ESC:

• ESC allowed limited tax and NIC exemptions for employer-contracted childcare or childcare vouchers.
• Employees could participate in salary sacrifice arrangements, trading part of their taxable income for tax-free childcare benefits.

However, ESC closed to new members after 4 October 2018. The government introduced the Tax-Free Childcare (TFC) scheme, a broader childcare support system.

Exemptions and Salary Sacrifice

ESC worked well within salary sacrifice arrangements. Employees gave up part of their salary, reducing both tax and NICs. This resulted in tax savings for both employees and employers.

Tax-Free Limits:

• Employees on lower incomes could receive £55 per week of childcare free of tax and NIC.
• For employees earning more than the basic rate threshold, the exempt amounts were reduced to £28 or £25 per week, depending on income.
• Employees who joined the scheme before 6 April 2011 were entitled to £55 per week regardless of their earnings.

Employers were responsible for conducting an annual basic earnings assessment to determine how much of the childcare benefit was exempt from tax and NIC.

Conditions for Continued Participation

Even after ESC closed to new entrants, existing members can continue to benefit under the scheme. However, employees who stop receiving childcare vouchers temporarily (for reasons like term-time work or maternity leave) can remain in the scheme, provided the break does not exceed 12 months.

Changes to Salary:

Employees must have had salary changes made by the 4 October 2018 deadline to continue benefiting from ESC.

Tax-Free Childcare Scheme (TFC)

The TFC scheme, introduced by the government, offers families direct childcare support. The relief is 20% of childcare costs, up to £2,000 per child annually, or £4,000 for children with disabilities.

Eligibility:

• All parents must work at least 16 hours per week.
• Household income must be under £100,000 per year per parent.
• Parents cannot participate in both ESC and TFC at the same time. They must inform their employer if they switch to TFC, after which they will no longer receive ESC benefits.

For businesses and employees in Nottingham, AHACCOUNTANTS can provide detailed guidance on how to handle ongoing ESC benefits, make the switch to TFC, and navigate the complex tax and NIC implications.