New tax exemption

Employer provided childcare vouchers could prove a useful boost for staff.

A new tax break introduced in April this year enables dentists to provide childcare vouchers of up to £50 per week to their staff – tax and National Insurance free. This will be of particular benefit to any hygienists, dental nurses and receptionists who up to now have had to pay for childcare out of their net pay.

How childcare voucher schemes work in practice:

Dentists can give employees up to £50 per week free of tax and National Insurance by way of childcare vouchers. This will be worth up to £1,066 to a higher rate taxpayer and £850 to a basic rate taxpayer. Childcare vouchers can be provided as an addition to the employee’s salary or instead of salary. The latter option, known as a salary sacrifice scheme, is discussed in greater depth later below.

The schemes work by the employer providing the employee with childcare vouchers which can be used by the childcare provider in the same way as cash. Electronic childcare vouchers are also available.

Conditions

As is common with schemes providing tax relief, there are conditions attached.

To qualify for the tax break two principal conditions must be met:

Vouchers must be generally available to all employees. This test should be easily achieved by most dentists.
Employees can only use the vouchers to pay for childcare that has been registered or approved by the appropriate statutory body. This would include childminders, nurseries, play schemes and nannies. You should be aware that if the child carer is a relative, no tax relief will be provided – even if she or he is registered or approved.

Of particular relevance to many dentists is the fact that nannies or au pairs are eligible to apply for approved status.

Salary sacrifice schemes

Childcare vouchers can be provided as part of a salary sacrifice scheme whereby the employee may elect to substitute part of their salary for vouchers. The example below illustrates such a scheme.

Salary sacrifice schemes are a well-established means of remuneration and are generally accepted by the Inland Revenue. However, dentists and their staff who are proposing to enter into such arrangements should take legal or professional advice as they represent a change in the conditions of employment. Also, employees receiving childcare vouchers from their employers cannot claim the childcare element of Working Tax Credit on the same costs.

Non-monetary benefits

As well as the obvious tax and National Insurance benefits referred to earlier, there are other less visible benefits for the employer. Childcare vouchers are a very effective method of attracting and retaining key staff. At a time when there is an acute skills shortage in dentistry, it makes sense to introduce measures to help staff to meet the cost of good quality childcare.

Dentists will be able to:

make savings through reduced recruitment and training costs
reduce absenteeism
improve retention of experienced staff
improve staff morale.

The childcare tax relief has been generally well received by small businesses and dentists should view these measures as a real boost to assisting mothers into work.

Summary of key benefits

Employees electing to take £50 per week by way of childcare vouchers instead of salary will save between £850 for a basic rate taxpayer and £1,066 for a higher rate taxpayer.
Dentists do not pay employer’s National Insurance on the childcare vouchers – a saving of £300 per employee.
The £50 a week limit applies to each employee. It is not affected by the number of children and can be claimed by both the father and the mother.

Miss Took earns £28,000 per year on which she pays income tax and National Insurance. She pays for childcare out of her net after tax salary. If a dentist were to introduce a salary sacrifice scheme one would have the following scenario:

	BEFORE	AFTER
Cash salary	£28,000	£25,400
Childcare vouchers	-	£2,600
Total salary package	£28,000	£28,000
Tax and NI	£7,380	6,522
Net pay	£20,620	£21,478
Less: Childcare	£2,600	£2,600
Net disposable income	£18,020	£18,878
ANNUAL SAVING		£858

This assumes that the employee is a basic rate taxpayer. For a higher rate taxpayer the savings will amount to £1,066 per year.

Willie MacKenzie is a chartered accountant and tax adviser specialising in the tax affairs of dentists. He can be contacted on 01483 419922, by email at wtm@accmac.plus.com or visit www.wesaveutax.co.uk