The increase in the limit for tax free payments to employees in the form of Childcare vouchers from £50 to £55 per week is probably a reasonable indication that the Government support this tax break and it is here to stay. However, it's important that if setting up a childcare voucher system for employees that its done correctly - get it wrong and the tax breaks won't be there. Remember that the scheme includes you if you are a director of your own Limited Company.

From 6th April 2006 the first £55 per week paid to an employee in the form of childcare vouchers for qualifying childcare with an approved childcarer is free of tax and national insurance.

This can save £944 per year for a basic rate taxpayer and £1172 for a higher rate tax payer. And the company saves employers NI of £366 per year per employee.

The company gets tax relief for the expense just as it would with normal wages.

To set this up you need to provide childcare vouchers to the employee, who uses them as payment with the childcare provider, who then cashes them in with the voucher provider. There are two ways to do this...

1. You can sign up with a childcare voucher company - just do a search on Google and many will come up. However they do take an admin charge of as much as 8%. However, as long as the charge is less than the 12.8% employers NI the employer is always ahead of the game. The childcare provider then cashes them in with the childcare voucher company.
   
   
2. There's no reason why you can't print your own vouchers, so the childcare provider then comes directly to the employer for payment.

Any downsides?

The scheme must be open to all employees. But wouldn't you want that if it saves YOU £366 per year on every employee. It is normally offered as a salary sacrifice whereby the employee sacrifices £55 of gross taxable pay in its place. The employee shouldn't have the contractual right to switch back and forth between cash and vouchers as they please.

If the employee is receiving Working Tax Credit they can receive up to 80% of their childcare costs. However, any childcare vouchers reduce the cost of childcare and so can reduce the Working Tax Credit Claim. This calculation can get very complicated but often the claimant will be worse off.

If you as a director or your employees pay for childcare it's got to be worth further investigation. It MUST be set up correctly - do not do it without proper advice.

There is a simple guide on the HMRC website. It includes details of the scheme, a model contract for a day nursery, and a sample childcare voucher for businesses to use.

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