You can pay child care costs through your limited company if this is the structure you’ve chosen for your consulting work. By doing it this way, you may also benefit from income tax relief and additional exemptions on your National Insurance contributions.
Here’s the Smart Team’s 2-minute guide to the childcare options open to you and your limited company and any relevant tax reliefs.
Childcare Voucher Scheme
Time is running out with this scheme – no new applications will be considered after October 2018.
Childcare vouchers can be spent in nurseries and on childminders, out of school clubs, after-school clubs and nannies.
Childcare works using “salary sacrifice”. Let’s say that you paid yourself £1,000 in salary – you’d be left with around £700 post-tax as a basic rate payer. Instead of paying yourself it, you can simply transfer the £1,000 in the form of a voucher to the person or organisation caring for your child, saving you £300.
If you’re a basic rate tax payer (up to £46,500), you can use up to £243 a month in vouchers. Higher-rate taxpayers can use up to £124 a month with additional rate taxpayers up to £110 a month.
Generally, childcare vouchers are better when your childcare costs are £9,336 a year or more as a basic rate taxpayer (£6,252 as a higher rate tax payer), if one of you does not work, and those earning over £100,000 a year or more.
As a company director, you will have to set up this scheme for your company and then claim on it as an employee.
Tax Free Childcare
The replacement for the Childcare Voucher Scheme is the Tax-Free Childcare system and it launched in April 2018.
Parents receive a childcare account for their children. For every £8 you pay in, the government will pay an additional £2 up to a maximum of £2,000 per year per child (£4,000 if your child has a disability) up until the age of 12 (17 if your child is disabled). To qualify, you must earn the equivalent of at least 16 hours at the National Living Wage or National Minimum Wage (whichever is applicable) and less than £100,000.
If you are with your child’s other parent (or step-parent), both of you must work to qualify. If one of you is out of work, your entitlement to Tax Free Childcare ends.
Tax-free childcare is generally a better choice for those earning less than £100,000 a year, the self-employed, when both parents work, and those with more than one child.
Paying for childcare
You can arrange for your company to pay for the childcare directly once you’ve decided the amount that you want to pay. You can’t pay in cash, you can’t claim for school fees, and when your childcare providers issues an invoice, it must show your company name and not your personal name.
To claim tax relief on the costs of childcare, you must choose a registered childcare provider and you must be the child’s parent or legal guardian (or have legal responsibility).
We can help
To make the most of the allowances available for childcare as a contractor, call Smart Team on 01202 577 500 or email us at firstname.lastname@example.org.