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Childcare vouchers for employees with other income

What is the tax-free limit for employees who have other income (dividends) and submit tax returns?

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I need to assess the tax-free limit of childcare vouchers for an employee who will be ceasing directorship of a company and becoming a regular employee of that same company, and their pay will jump significantly, but will remain within the basic rate band at the end of the tax year (I assume I will need to take into account the salary they will earn up until 5 April 2022 rather than the new yearly salary). However, they also have dividends from the company taken before the change occurs, which will move them into the higher rate. 

I understand that the assessment of earnings should only take into account that employment only. However, should the dividends be included? Also, do I include the director's pay in the assessment as technically they were employees then as well?

In addition, the vouchers they purchase are already higher than the tax-free amount for basic rate tax payers. Provided the dividends should be excluded, do I choose the tax-free amount for basic rate tax payers and anything over will be shown on a P11D and the tax return after the end of the tax year? Although, I cannot really see how this would work because I would only include the amount that is over the tax-free amount. What about the element of the voucher that is deducted as salary sacrifice?

I would be grateful for any suggestions. Thank you. 

Replies (8)

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By lesley.barnes
26th Oct 2021 11:50

I would suggest that the Director concerned speaks to his accountant. There are so many unknowns in what you are asking. He will need advice tailored to his circumstances.

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By David Ex
26th Oct 2021 11:53

MinimalDamage wrote:

I would be grateful for any suggestions. Thank you. 

Have you read all the information on the gov.uk site?

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By Hugo Fair
26th Oct 2021 13:37

Do you mean 'Childcare Vouchers' or 'Tax-free Childcare' (they're not the same thing?

* https://www.gov.uk/help-with-childcare-costs/childcare-vouchers (closed for a few years unless staff member was already a member of scheme prior to 04/10/2018)

* https://www.gov.uk/tax-free-childcare

These are useful points at which to start your investigation ... and will help you see why others are referring to the likelihood of many more unknows to follow-up.

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Replying to Hugo Fair:
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By MinimalDamage
26th Oct 2021 14:13

I do mean Childcare Vouchers.

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Replying to MinimalDamage:
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By Hugo Fair
26th Oct 2021 15:30

So has "employee who will be ceasing directorship of a company and becoming a regular employee of that same company" been a member of the Voucher scheme continuously since before 4th Oct 2018 and via the same employer (who continues to run the scheme and offers it to all employees)?

Has the employee also successfully applied for Tax-Free Childcare?

You say "their pay will jump significantly" and then go into a certain amount of confusing detail about changes in salary and dividends and so on. The only thing that matters (in terms of the value of childcare vouchers that can be tax-free) is determined by a BAE (‘basic earnings assessment’) - which should be calculated for you by any advanced Payroll system If not, you'll have to look up the rules and perform the calc by hand.

Finally you ask "do I choose the tax-free amount for basic rate tax payers and ..?"
You don't choose anything (that's down to the employee). But if the employer provides childcare vouchers above the exempt limit for that specific employee, they must report the amount above the limit on form P11D.

Given that you've only been running Payrolls for 3 months, you will need access to expert advice from time to time. Have your employers not signed you up for some Payroll training and/or CIPP (to whom you could take these complex issues)?

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Replying to Hugo Fair:
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By MinimalDamage
26th Oct 2021 17:53

Thanks for the helpful comments.

Yes, the employee is eligible and has not applied for tax-free childcare.

That was the issue I had - determining what the basic earnings were in this case.

Our payroll software does not assist with this.

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Replying to MinimalDamage:
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By Hugo Fair
26th Oct 2021 18:42

OK, that's a shame. [BTW apologies for mis-spelt acronym in previous post, which should of course have said BEA not BAE!]

You could take a look at https://payadvice.uk/2021/03/22/child-care-vouchers-2021-2022-basic-earn... which is produced by a regular contributor to this site (and respected Payroll guru) - Simon Parsons.

Now it is clearer that your main question is "I understand that the assessment of earnings should only take into account that employment only. However, should the dividends be included? Also, do I include the director's pay in the assessment as technically they were employees then as well?"
IMHO the answers to those two questions are ... No and Yes (but only in the sense of the resultant expected earnings during the whole year, not the individual annual salaries).

Hope that helps for now.

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Replying to Hugo Fair:
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By MinimalDamage
26th Oct 2021 19:06

Thank you, this is very helpful.

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