By ACCA’s Budget team
Tax relief on childcare costs will be equalised so that basic rate, higher rate and additional rate tax payers all receive the same amount of financial relief.
This change will affect employees who pay higher rate or additional rate tax and who join an employer-supported childcare (ECS) scheme on or after 6 April 2011. It applies where the scheme provides childcare vouchers (CCVs) or directly contracted childcare. It will not affect employees who are already part of a scheme.
At present, basic rate tax payers can receive tax relief of up to £900 a year, while higher rate taxpayers can receive up to £1,200 and additional rate taxpayers £1,500 per year. This is calculated using the tax exempt limits of £55 per week set out in the legislation (Income Tax (Earnings and Pensions) Act 2003 sections 270A and 318A).
From 6 April 2011, the new income tax exempt limits will be £28 per week for higher rate tax payers and £22 per week for additional rate tax payers. This means that the monetary value of the tax relief will be based on £11 per week.
At present, the relief is based on the £55 exemption a week-which for a basic rate tax payer equates to £11 (£55 x 20%), but for a higher rate payer is £22 (£55 x 40%) and for additional rate tax payers £27.50 (£55 x 50%). Now everyone will get the same monetary amount: basic rate remains the same, higher rate tax payers will get (£28 x 40%=) £11.20; and additional rate tax payers will get (£22 x 50%=) £11.
Secondary legislation will be introduced to align the National Insurance Contributions disregard to these levels.