Questions and Answers

Can an employee return unused childcare vouchers to the employer? If so, are they put through the payroll as income to collect Tax & NICs?

• The tax and NICs exemption applies to non-cash vouchers only. Childcare vouchers are, by definition, non-cash vouchers. They are issued to be used in exchange for childcare and nothing else. So, if an employee is entitled to cash-in unused vouchers as a matter of course, this would mean that the intention of the voucher is for either childcare or cash. The exemption would not therefore apply to any of the vouchers provided by the employer.
• That said, HMRC accept that unforeseen circumstances can arise which mean that a voucher cannot be used for the purpose for which it was intended (for example, death of the child, redundancy of one parent etc). Where such a situation occurs, and the employer agrees to exchange the unused voucher for cash, HMRC will continue to regard the voucher scheme operated by the employer as a non-cash voucher scheme for the purpose of applying the exemption.
  • Those vouchers which are exchanged for childcare will accordingly be non-cash vouchers for the purpose of the exemption.
  • But cash payments made in return for vouchers in the unforeseen circumstances outlined above would be liable for tax and Class 1 NICs in the normal way.

Do employer-provided childcare benefits and childcare vouchers count towards National Minimum Wage?

• No. Benefits provided in return for a reduction of cash pay (a salary sacrifice) cannot take pay below NMW rates.

Can a person benefit from tax and NICs-free employer-provided childcare or childcare vouchers to contribute towards childcare for a child who is not their own (e.g. if they are a grandparent of the child)?

• The legislation allows the exemption to employees who have a ‘qualifying child’. A qualifying child is a child up to 1 Sept following their 15th birthday (16th birthday if the child is disabled) for whom the employee is either:
  • The actual parent of the child; or
  • is living with the child and has parental responsibility for the child.
• Parental responsibility is defined in legislation as meaning “all the rights, duties, powers, responsibilities and authority which by law a parent of a child has in relation to the child and the child's property”.

What should the employer do if childcare registration or approval is withdrawn?

• The tax and NICs exemptions applying to employer-provided childcare benefits and childcare vouchers are subject to qualifying conditions which include that the childcare provided or paid for with vouchers is appropriately registered or approved. Where the qualifying conditions are not met the employer is responsible for ensuring the correct payment of NICs and reporting of benefits for tax.
• The employer should therefore take appropriate steps to be satisfied that the conditions for the exemption are met. Guidance on the steps to take is covered in the Inland Revenue booklet 480 (2005).
• If the employer finds out that the childcare registration or approval has been withdrawn they should start deducting NICs from the next payment. The benefit for tax purposes should be calculated from the date the registration or approval was withdrawn. If the childcarer concerned looks after the children of any other participating employees, the employer should follow the same procedure for those employees. Employers will be able to pick this up if they keep records of their scheme by childcare provider as well as employee.

If the employer buys childcare places from a third party childcare provider (e.g. a commercial nursery) in what circumstances is the benefit-in-kind fully exempt from tax and NICs?

• If an employer buys places from a third party childcare provider and gives the childcare to an employee as a benefit in kind, the first £50 a week will be exempt from tax and NICs if the qualifying conditions for the exemption are met. For information about the qualifying conditions refer to booklet 480 (appendix 12).
• If the childcare is provided on the employer’s own premises it may be totally exempt from tax and NICs if the qualifying conditions for the full exemption are met.
• If the childcare is provided on other non-residential premises, it will be totally exempt from tax and NICs only if the employer is providing the childcare in partnership with others and the partnership conditions are met. These are that the employer has whole or partial responsibility for financing and managing the provision of the care. Employers who enter such arrangements must report the taxable value of the benefit of places provided through these schemes on form P11D for tax purposes and account for Class 1A NICs. The taxable value will either be the full value of the benefit or the excess over £50 a week if the qualifying conditions for the limited exemption are met.
• The conditions relating to care provided on other non-residential premises are intended to restrict the full exemption to circumstances where the employer has a real involvement in the running of the provision, either solely or in partnership. HMRC is aware that some commercial nursery organisations market schemes that purport to satisfy the partnership conditions. HMRC considers such arrangements are not effective and that the partnership conditions are unlikely to be met where employers use commercial nurseries to provide childcare. Employers are advised to consult the HMRC guidance at www.hmrc.gov.uk/manuals/eimanual/eim21900.htm, in particular considering the guidance at EIM 21970.

If an employer provides childcare vouchers in excess of £50 a week is the excess liable for NICs and if so, which Class?

• Since 6 April 2005, only the first £50 a week of qualifying childcare vouchers are exempt from NICs. Any excess is liable for the payment of Class 1 NICs.

Will using childcare vouchers to pay a nanny for her services in looking after a child affect how the parent calculates her tax and NICs?

• No. For the purposes of tax and NICs paying a nanny in childcare vouchers is no different to paying her in cash. Although the vouchers have come to the parent (from their employer) tax and NICs free, in the nanny’s hands they are part of her cash remuneration as she will exchange them for cash. The parent should calculate the amount of tax and NICs on her total pay including the vouchers in the normal way.

Can small employers operate childcare voucher schemes?

• Yes, there is no reason why a small employer cannot provide qualifying childcare vouchers to its employees. Voucher company administration fees may be less economic for small companies but there is nothing to stop any employer producing vouchers and administering a scheme themselves. They will just need to ensure that the qualifying conditions for the exemption are met and that they maintain sufficient records in order to be able to demonstrate that this is the case.
• Employers with only a few employees using childcare may, however, find it much easier to buy the childcare directly from the childcare provider and to give the provision to their employee as a benefit in kind. The amount of tax and NICs exemption due if they do this is the same as for childcare vouchers and the qualifying conditions are no different.