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Introduction »

EMPLOYMENT

Employer-supported childcare

Changes had previously been announced to the tax breaks for employer-supported childcare and draft legislation has now been issued covering the changes which take effect next year.

There is currently a £55 per week limit on the amount of exempt income associated with childcare vouchers and directly contracted childcare for employees in an employer’s scheme. From 6 April 2011 this will be restricted in cases where an employee joins a scheme and their earnings and taxable benefits are liable to tax at the higher rates.

Employers will be required, at the beginning of the relevant tax year, to estimate the level of employment earnings that their employee is likely to receive during that year, ignoring potential bonus and overtime payments, but including other known taxable benefits. Income for the purpose of the calculation will be reduced by the personal allowance as shown on the individual’s tax code for the relevant employment.

If the level of income:

• is within the basic rate band, the employee will be entitled to relief on up to £55 per week
• exceeds the 50% rate threshold for the year, the employee will be entitled to relief on £22 per week
• is between the above two bands the employee will be entitled to relief on £28 per week.

Where an employee is employed part way through the tax year their income will be grossed up to a full year.

Anyone in a scheme by 5 April 2011 will not be affected by these changes as long as they remain within the same scheme.

Employer-supported childcare – salary sacrifice

Employees at or near the National Minimum Wage (NMW) cannot normally take advantage of salary sacrifice arrangements if the result would be to depress the level of their income below NMW rates. Where an employer excludes these employees from participation in a scheme, the exemption from the chargeable benefit on childcare should not apply to the scheme as a whole.

The government has issued draft legislation to ensure that employers who exclude such employees are able to benefit from the exemption for employer-supported childcare. This change is retrospective.

Disguised remuneration

Legislation will be introduced from April 2011 to tackle arrangements using trusts and other vehicles to reward employees which seek to avoid, defer or reduce tax liabilities.

In many cases these third party arrangements allow an employee to enjoy the full benefit of a sum of money paid or assets provided while arguing that, because of the structure of the arrangements, there is no legal right to the money or assets.

Legislation will be introduced to ensure that where a third party makes provision of what is in substance a reward or loan, in connection with the employee’s employment, the employer will be required to account for PAYE and NICs. This will be based on the sum of money made available or the cost or value of the reward.

The scope of the legislation will include Employer Financed Retirement Benefit Schemes, in keeping with the restriction of pensions tax relief on registered pension schemes.

Introduction »