At present, employees do not pay tax on the benefit of a place in a nursery provided by an employer, as long as the provision satisfies strict criteria. If the nursery is not on the employer's own premises, the employer must be wholly or partly responsible for both the financing and management of the nursery. This tax break has been relatively limited in its scope.
A more popular form of support is employer-provided childcare vouchers, which can be used for any form of childcare. These are exempt from both employers' and employees' national insurance contributions (NICs), but employees are taxed on them.
A consultation paper issued jointly by the Treasury and the Inland Revenue last week explains that the Government intends to expand the workplace nurseries tax exemption to include all forms of registered childcare, including approved childcare in the home. A new tax exemption will also be introduced for childcare vouchers.
A financial limit will be introduced for the tax and NICs exemption on all formal childcare provision. The consultation proposes that this should be 50 per week per employee, with the excess subject to tax and NICs.
This will not apply to nurseries managed and financed by the employer on the employer's own or shared premises, in which case the full benefit will remain exempt, as at present.
The consultation paper explains that the Government intends to set this limit in order to reduce the incentive for employees to engage in salary sacrifice arrangements (also known as salary conversion or fee-direct) for supporting childcare, whereby the employee relinquishes part of his or her salary and receives support for childcare instead. Such arrangements save the employer NICs on the amount of salary that is sacrificed. However, employees' access to state benefits and future pension entitlement may be adversely affected.
The Treasury also intends to make it easier for employers providing workplace nurseries to qualify for the tax break up to the 50 per week limit by removing the requirement for the employer to have management responsibility for the provision. The consultation makes it clear that childcare support schemes should be available so all employees, not just the favoured few, can qualify for the tax exemption.
Launching the document, Employer-supported Childcare, at the workplace nursery run by the Royal London Hospital, paymaster general Dawn Primarolo said, 'The Government is determined to help parents to balance their work and family life. Employers have a very important role to play in helping their staff to achieve a balance and in helping parents meet their childcare needs. We are committed to supporting them in this. Today's proposals will help to ensure that more parents than ever before have access to affordable, good quality childcare.'
Stephen Burke, director of the childcare charity Daycare Trust, welcomed the review of tax incentives. He said, 'It's an opportunity to encourage employers to do more for working parents, particularly those on lower and middle incomes. The current arrangements need to be enhanced so that more employees benefit from help with childcare provided by employers. Beyond that, the review can examine how best to enable employers to fulfil their corporate social responsibility.'
The consultation paper is available on www.hm-treasury.gov.uk and www.inlandrevenue. gov.uk. The Inland Revenue also published guidance on salary sacrifice arrangements last week, available on its website.
