Tax Credits and Salary Sacrifice Childcare Vouchers

[DingbatsFur]

Hi Folks,
I seem to remember that there's an incompatibility with Tax Credits and Childcare vouchers through salary sacrifice. Has anyone seen this?
Basically, DH and I have started claiming tax credits again as his job hasn't been the best for the past couple of years. We pay 175£ a week in childcare for the two DSs. I do the full amount of childcare voucher salary sacrifice as did DH when he had a salary. The way I'm looking at it because the tax credit people see my salary before the salary sacrifice is taken off, then how can they possibly care whether I sacrifice it for child care or not? It seems rather unfair. There was nothing on the form with regards to salary sacrifice other than to say you inputted your gross salary. And also, how can the salary sacrifice scheme be viewed as a benefit because it's my money I'm buying the vouchers with anyhow?
Sigh.

They are interested yes because you are getting a credit for the amount of tax you've paid on your gross salary. With vouchers you don't pay as much tax so you shouldn't get as much credit - or I think that's how the theory goes. Lord knows how they work it out - wrongly I expect!

It is because you sacrifice paying the tax, you lower your income and therefore get a tax break and then to get two tax breaks on the same money the tax credits people say is not legal.

You can choice though which tax break you want to take - so it is up to you which way is better for your finances

Actually it is neither of those things.

The childcare element of Working Tax Credit is a benefit (not a tax break) that you can claim to pay for child care costs. If your employer is paying (part of) your child care cost through vouchers, you are not incurring that cost so you can't claim the benefit.

So the decision on whether to sacrifice salary for vouchers or claim WTC depends on the amount of income and the amount of child care costs. HMRC provide a calculator to help you work this out.

Thanks folks, mranchovy, that makes perfect sense.
My employer is not paying for my childcare vouchers though as it is my salary that is paying for them, but I suppose by paying you mean the tax and ni element?

I'm now going to throw a further spanner in the works as MrFur has got himself a job working for a company in the Republic of Ireland which won't give him the vouchers. Does not paying tax in this country affect your entitlement to working tax credits?

No, it IS your employer that is paying for the vouchers, they are NOT paid for from your salary.

That is the whole point of a salary sacrifice arrangement which is an arrangement between you and your employer whereby you agree to take a lower salary and the employer agrees to pay an equivalent amout for childcare. The distinction may not seem important, but it is this distinction that saves tax and national insurance for you and national insurance for your employer: if your employer were simply to purchase vouchers from your salary and give them to you they would have to be paid for from your salary after tax and NI and there would be no savings.

Looking back at your original post you say that "there was nothing on the form with regards to salary sacrifice other than to say you inputted your gross salary" - hopefully there was more to it than that otherwise HMRC may not view the arrangments as an effective salary sacrifice and are unlikely to have approved the scheme.

Do you mean he is working in the Republic of Ireland, or working here for a company that is based there?

Hi MrAnchovy,
Well it appears the debate is academic as the form arrived from the tax credit folk & we do not qualify for the childcare element of tax credits anyhow so I do not have to call them to adjust.
MrFur will live in NI but be paid by an Irish company and taxed by the ROI. Madness.
It is an official salary sacrifice btw but my impression was I was reducing my salary by 243£ a month for my employer to pay me in childcare vouchers. It is still my money though just paid as vouchers. The form I am referring to is the tax credit form.