How to calculate tax and Class 1 NIC liabilities on childcare vouchers.

In principle, no liability for tax or Class 1 NICs arises where childcare vouchers with a value of not more than £55 per week are provided for employees. Where the weekly "exempt amount" is exceeded,

• the tax liability is reported on form P9D or P11D, as appropriate, after the end of the tax year
  
  
• the NICs liability is checked in each earnings period and, if a liability arises, the amount is added to the employee's gross pay for that period (for NICs purposes only).

As with all non-cash vouchers, any NICs liability on childcare vouchers is for Class 1 NICs, not Class 1A NICs. Both employee and employer must pay Class 1 NICs if the weekly limit is exceeded. Any liabilities are determined for each earnings period.

The rules for determining the NICs liability for childcare vouchers, as set out in the Social Security (Contributions) Regulations 2001, are similar to those for tax but are complicated by the requirement to meet liabilities in each earnings period rather than annually. HMRC is happy for employers to use a simplified method if vouchers are provided in regular monthly instalments throughout the tax year.

The cost of providing childcare vouchers for tax and NICs purposes

The value on which the tax charge for non-cash vouchers is the "cost of provision", i.e. the expense incurred in providing the vouchers. The value for Class 1 NICs purposes is called the "chargeable expense" but it is the same as the "cost of provision". However, the value of childcare vouchers for both tax and NICs purposes is not necessarily the same as the face value of the vouchers.

For example, employers can obtain Marks & Spencer gift vouchers with either a 2½% or 5% discount depending on the order value. It may, therefore, cost the employer £47.50 to provide a £50 gift voucher. Unless there are any other acquisition costs, the value of the voucher for both tax and NICs purposes would be £47.50.

The same rule applies to childcare vouchers except that, as most childcare vouchers provided for employees under salary sacrifice schemes are provided by specialist suppliers, employers normally pay an amount equal to the face value of the vouchers, plus additional administration costs. For example, the management fee on a £55 childcare voucher could be £5.50. On this basis, the "cost of provision" and the "chargeable expense" would be £60.50 - the expense incurred by the employer in providing it.

The "exempt amount" for tax and NICs purposes

The "exempt amount" for both income tax and NICs purposes is defined as

• £55 for each qualifying week in the tax year, plus
• the "voucher administration costs".

The "voucher administration costs" are the difference between

• the cost of providing the voucher, and
• its face value, i.e. the value of the childcare for which it can be exchanged.

The effect of including the "voucher administration costs" is that the "cost of provision" or the "chargeable expense" for a childcare voucher with a face value of £55 is always the same as the "exempt amount" for that voucher.

Examples

1. An employer buys a voucher with a face value of £55 for £60.50, i.e. £55 plus £5.50 administration charge. The "voucher administration costs" are £5.50, i.e. the difference between £60.50, the cost of providing the voucher, and £55, its face value. As a result, the "exempt amount" is £60.50, i.e. £55 + £5.50, the same as the "cost of provision".
   
   
2. An employer buys vouchers with a face value of £55 at a discount. Each voucher costs £58.50, i.e. £53 plus £5.50 administration charge. The "voucher administration costs" are £3.50, i.e. the difference between £58.50, the cost of providing the voucher, and £55, its face value. As a result, the "exempt amount" is £58.50, i.e. £55 + £3.50, the same as the "cost of provision".

In practical terms therefore, the additional administration costs can be ignored for childcare vouchers. For this reason, HMRC's guidance presents a simplified approach to assessing the tax and NICs liabilities for each pay period. The "exempt amount" is treated as being £55 per week, or £243 per month, or the equivalent for any other pay period. As long as the face value of the voucher(s) provided each pay period does not exceed the relevant figure, there is no tax or NICs liability. The administration costs are ignored.

Record-keeping and reporting for tax purposes

For P9D and P11D reporting purposes, employers must, for each employee, keep a record of each week during the year for which vouchers were provided that exceeded the exempt amount, i.e. £55 per week, or that did not meet the qualifying conditions. So, for example, if vouchers to the value of £100 are provided for a single week, the extra £45 is recorded and reported at the year end. However, if an employee receives, say, four £55 vouchers at one time but they relate to four separate weeks, they all qualify for the exemption.

There is no "averaging" provision in the tax legislation.

Example

If vouchers to the value of £200 are provided for each of the 6 weeks summer holidays and no vouchers are provided for the rest of the year, the reportable benefit at the year end is £870, i.e. 6 weeks × £145. The exempt amount is £55 per week, not £2,915 per annum.

Record-keeping and reporting for Class 1 NICs purposes

There are two methods of determining liabilities for Class 1 NICs - the "statutory" method and the "simplified" method.

The simplified method

This approach is not defined in legislation and is a concessionary approach that may only be used when the value of childcare vouchers provided:

• is the same every earnings period, or
  
  
• varies in each earnings period but never exceeds £55 per week or £243 per month, or the equivalent for any other earnings period.

Example A (using simplified method)

A monthly-paid employee is provided with childcare vouchers with a face value of £243 each month. The exempt amount is £243. For both values, any administration charges are ignored. As the chargeable expense does not exceed the exempt amount, there is no NICs liability for the earnings period, or for any of the earnings period during the tax year.

The statutory method

The statutory calculation procedure must be used if

• the value of the vouchers provided exceeds the exempt amount in any earnings period(s), or
  
  
• the vouchers are provided in instalments that differ from the employee's earnings period.

In either of these situations, the "exempt amount" is defined as

• the exempt amount for one week, including the administration charges, multiplied by
  
  
• the number of qualifying weeks
  
  
  
  
  
  • for which the employee has been employed by the employer in the current tax year, and
    
    
  • for which no other qualifying voucher has been provided by the employer.
  
  

This arrangement recognises that, unlike tax liabilities, NICs liabilities have to be assessed for each earnings period and, where a certain value of vouchers provided in one earnings period relates to earlier earnings periods, it would be unreasonable to treat them all as having been provided in that earnings period. The procedure provides a cumulative method of determining the NICs liabilities.

Examples

1. A weekly-paid employee is provided with childcare vouchers with a face value of £220 in tax week four (i.e. 4 weeks @ £55). The employer paid £242 (i.e. £220 + £22) for them, including administration charges. No other vouchers were provided in the first three weeks of the tax year. The chargeable expense for the earnings period is £242. The exempt amount is also £242, i.e. £60.50 × 4 weeks. As the chargeable expense does not exceed the exempt amount, there is no NICs liability for the earnings period.
   
   
2. A weekly-paid employee is provided with childcare vouchers with a face value of £220 in tax week one, for use during the first four weeks of the tax year. The employer paid £242 for them, including administration charges, so the chargeable expense for the earnings period is £242. However, the exempt amount in this situation is £60.50 (i.e. £55 + £5.50) as the number of qualifying weeks is 1. The chargeable expense exceeds the exempt amount by £181.50, so there is a liability for Class 1 NICs on £181.50 for the earnings period.

If the statutory calculation method had been used in Example A (using the simplified method, above), there would have been an NICs liability in several of the months during the year. This is because the statutory calculation looks at the number of completed tax weeks up to the end of each earnings period.

Example A (using statutory method)

During the 2009/10 tax year, a monthly-paid employee is provided with childcare vouchers with a face value of £243 each month. The employer pays £267.30 for them, including administration charges (i.e. £243 per month, plus £24.30). The exempt amount is £60.50 per week (i.e. £55 plus £5.50). The monthly salary is paid on the last banking day of each month.

April: On 30 April the employee has completed 3 tax weeks (week 3 ends on 26 April). The chargeable expense is £267.30. The exempt amount is £181.50 (i.e. £60.50 × 3 weeks). There is an NICs liability on £85.80.

May: On 29 May the employee has completed 7 tax weeks (week 7 ends on 24 May). The chargeable expense is £267.30. The exempt amount is £242.00 (i.e. £60.50 × (7 weeks - 3 weeks)). There is an NICs liability of £25.30.

June: On 30 June the employee has completed 12 tax weeks (week 12 ends on 28 June). The chargeable expense is £267.30. The exempt amount is £302.50 (i.e. £60.50 × (12 weeks - 7 weeks). There is no NICs liability.