By Ian Holloway, head of legislation and compliance at Cintra HR & Payroll Services
For Employer-Supported Childcare (ESC) arrangements, either through the provision of the childcare voucher or directly contracted childcare, the ‘exempt amount’ is £55 per week (£243 per month / £2,915 per annum).
This is the amount that can provided free of a tax or National Insurance liability.
However, the Finance Act 2011 made UK-wide changes to the Income Tax (Earnings and Pensions) Act 2003 to limit the amount of tax relief available for people paying tax at either the higher (40%) or additional rate (45%) of tax. This is for people that entered an ESC arrangement with their employer on or after 06 April 2011. The objective of the change was to ensure that, broadly, the value of tax relief is restricted to the relief enjoyed by basic rate taxpayers (20%) and, therefore, the same for all taxpayers, regardless of their marginal rate.
Since April 2013, following the reduction of the additional rate to 45%, this has meant that that the following exempt amounts exist (in order of weekly, monthly and annual):
Basic marginal rate: £55; £243; £2,915
Higher marginal rate: £28; £124; £1,484
Additional higher rate: £25; £110; £1,325
The restricted amounts ensure that, approximately, tax relief is £11 per week for all taxpayers that entered an employer-supported arrangement on or after 6 April 2011 – i.e. £55
20% = £11, £28 40% = £11.20 and £25 @ 45% = £11.25.
As we approach the end of one tax year and the start of the next, now is the time to start thinking about performing the annual Basic Earnings Assessment (BEA) for people that joined the ESC scheme on or after 6 April 2011. This will predict earnings and benefits in the coming tax year, allowing us to identify their marginal rate of tax. It is these predicted marginal rates that will identify the amounts that can be processed through the payroll. If:
• The employee is predicted to be a basic rate taxpayer, they can receive tax relief on £55 per week (£243 per month / £2,915 per annum)
• The employee is predicted to be a higher rate taxpayer, they can receive tax relief on £28 per week (£124 per month / £1,484 per annum)
• The employee is predicted to be an additional rate taxpayer, they can receive tax relief on £25 per week (£110 per month / £1,325 per annum)
It’s a question of whether you like the horse’s mouth or HMRC’s guidance:
• The Employer Supported Childcare (Relevant Earnings and Excluded Amounts) Regulations 2011 give the required definitions of relevant earnings and excluded amounts. This adds to
• The Income Tax (Earnings and Pensions) Act 2003, sections 270A and 318A, which set the parameters for the restrictions and lead all the way back to the Income Tax Act 2007, or
• HMRC’s own ‘Frequently Asked Questions’ document. The information on what should and should not be included in the BEA is particularly good even if the information on the tax bands is out of date
Scottish tax bands diverge from ‘rest of the UK’ (rUK) countries in 2017-18. The result is that a Scottish taxpayer will start to pay tax at the higher rate (40%) sooner than a rUK equivalent taxpayer.
However, I have been reliably informed by HMRC that the divergence in tax bands does not impact the BEA and the following bands should be used (band; rate %; thresholds £):
Basic; 20; 0-45,000
Higher; 40; 45,001-150,000
Additional; 45; over 150,000
I would love to be able to report that there is a comprehensive all-singing and all-dancing tool that will magically produce the BEA for employers. However, this annual task is very much a manual process and one that payroll providers and advisors may not always be able to help on – they have a wealth of current and historical information but may not have the required predicted information.
Although, it may be worth contacting your payroll provider to see if they do produce a ‘tool’ to help employers with this annual administration task.
Posted on 1st March 2017 by Jerome Smail
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