Utilising childcare vouchers as a consultant

A slightly different blog post for today!

As some of my peers may know, I work as an independent consultant, and have ever since I graduated in 1995! There are many different schemes on the internet that claim to maximise your earnings but I’ve always steered clear of these as many get shut down when legislation catches up with whatever workaround they are using (indemnified loans, offshore trusts etc) to avoid paying tax. I believe everyone who earns money has an obligation to pay their fair share of tax.

However, the government offers a number of schemes to help offset the cost of childcare. One of these is childcare vouchers. I’ve spoken to a number of consultants who have never taken advantage of these on the mistaken belief that it’s too complex to set up and the costs involved in getting a third party company to administer the scheme would outweigh any benefit.

Neither are the case.

There is a common misconception that you actually have to run a voucher scheme, or join a third party scheme to benefit. You don’t. The voucher can be completely “notional” as long as the childcare provider meets the minimum requirements to participate. The HMRC rules state:

Childcare vouchers

Your options

You have two options if you choose to offer childcare vouchers.

1 Voucher providers can operate childcare voucher schemes on behalf of employers. They will charge an administration fee for the service. However, you will remain responsible for the correct deduction of tax and payment of NICs even if you use these companies.

2 You can produce and administer childcare vouchers yourself as long as you make sure the conditions for tax and NICs exemption are met and you keep records to support your scheme.

As you can see, option 2 allows a company to run their own scheme. The way I operate our scheme this is that I agreed with the nursery my daughter attends (or the after school club now she’s a little older) to invoice my limited company directly for any childcare up to the maximum allowable limit (for me, £55 per week per employee as I started the scheme pre-2011 when the allowances changed. Amounts now vary according to whether you’re a higher-rate tax payer or not). As my wife is also an employee of my limited company, and childcare vouchers have to be offered to all employees, we qualify for up to £486 per month of vouchers between us.

Each month, I then reduce our salaries by an identical amount (known as salary sacrifice) – this both reduces our tax & NI liability, but also potentially the employers  national insurance contribution although this depends on whether your salary is above or below the NI thresholds.

There is never any voucher issued or given to the nursery, but we can both benefit from the scheme, even for the same child.

Childcare vouchers can be utilised not just for nursery-aged children, but any Ofsted authorised childcare provider for children up to 15. That includes nannies, child minders, after school clubs.

Useful References

HMRC employers FAQ

HMRC tax manual section on childcare vouchers