CHILDCARE VOUCHERS - IS IT WORTH APPLYING IF YOU ARE A LTD COMPANY?

[hst123]

Hi, My husband and I have just set up a LTD company. We have both been advised to pay ourselves minimum wage and draw dividends when needed. We would like to apply for childcare vouchers as our youngest is in nursery till september. We dont know if it is worth raising our salary by £55pw into taxable income to claim for the vouchers, or if increasing our salary would indeed be taxable if it was purely for childcare. Has anyone else come across this dilemma. I can't work out the maths.

Childcare vouchers are tax free up to £55/week so you won't be putting yourself into taxable income levels.

Need to do the whole thing properly though with salary sacrifice agreement between you and your employer (LTD company) and contract between nursery/childminder and your employer.

Thanks!

If you employ anyone else other than you and dh you must offer them tehy same salary sacrifice for childcare vouchers opportunity.

Have you checked out that the rules change from April ?

See the "mumsnet latest" panel on the right hand side here--->

I just took a look and if it doesn't count as taxable income as you say, I wont be in any tax bracket as my tax advisor is telling us to pay ourselves £6500 per year. Adding in the £55pw will take that to £9360 but I guess I wont be taxed on that because the extra income is for the vouchers. So I assume the changes wont affect me? Even my tax advisor is having trouble figuring it out. We dont employ any other people permanently, it's just the two of us. We sometimes use freelancers which i think doesn't count as they dont get put on the PAYE system. Thanks for your response, its been V helpful.

In this situation you still benefit from the saving at your marginal tax rate, less the costs of operating the scheme.

Your tax advisor needs to look at it this way: vouchers up to the appropriate limit are provided free of tax and NI (for both employer and employee), so there is nothing more paid through PAYE, and they are not classed as a benefit so they do not appear on a P11D - there is therefore no additional tax to pay on them. BUT the company earns less profit so it pays less tax, but has less profit available to pay dividends: 80% of the voucher value less.

If you pay basic rate tax, there is no more tax to pay on the dividends so you are better off by 20% of the voucher value. If you pay higher rate, you pay 25% tax on the net amount of the dividends so your dividend after tax is 80% x 75% = 60% of the voucher value less, leaving you 40% of the voucher value better off. And for upper rate 50%.

Because of the way the April 2011 changes work, you will not be affected by the new limits as it is only your (contractual) salary from the employer providing the vouchers that affects the limits, not your total income.

Anyone advising on efficient tax structures for SMEs really should know this, not 'have trouble figuring it out'

Can't really follow mranchovy reasoning above but here's my thoughts...

I assume your advisor has suggested paying a small salary up to NI limit and then topping up with dividends, so you won't save any tax or NI by having childcare vouchers as you won't be paying any tax or NI anyway. (there is no NI on dividends and you don't pay any tax on dividends within your basic rate band).

If you were to have childcare vouchers then the company could make a saving as childcare vouchers can be deducted as an expense from the company profits.

The effect on the company's profits would be
£55 per week x 52 weeks x 2 of you = £5720 x small co rate of tax 20%= £1144

However you would have to pay the childcare voucher company an admin fee so this would reduce the tax saving.

Also if you are getting tax credits the childcare amount you can claim for will be reduced by the amount you claim as vouchers, this is something you need to bear in mind.

Thanks Morph2, thats exactly what I was trying to say

Thanks for your detailed responses, I appreciate it.

You don't need to use and pay a childcare voucher company so all tax savings can remain with you and dh/the company.

If you have a small business you can make your own vouchers as you will easily be able to control the vouchers in circulation, no possibility of fraud by employees etc.

Still need to get a salary sacrifice agreement in place and a contract between employer and ofsted registered childcare provider.

Yes it looks like youdoneedagoodsolicitor - or maybe an accountant salary sacrifice is not appropriate in this situation, and there is no need for the employer to contract with the child carer direct, although this might be easier than setting up a voucher scheme.

Details are in this guide from HMRC, but unless you have time on your hands to wade through that and work it all out for yourself it is probably easier to go with a provider that will do it all for you.

This guide is also useful.

Salary sacrifice agreements in place "tick" HMRC criteria in qualifying the scheme as legitimate.

No matter how small the business, having good documentation in place when HMRC open a PAYE enquiry, particularly when considering a possible aspect enquiry in respect of whether there has been diverting of income between husband and wife, to reduce overall tax bill, can pay dividends in the long run.

I'll say it again, a salary sacrifice scheme is not appropriate where the only employees are the shareholders - you just give the vouchers as a benefit.