Tax-Free Childcare Revisited

Tax-Free Childcare

Tax-Free Childcare is a government scheme available to working parents, including the self-employed, with children aged 0 to 11.

Eligible parents can get up to £2,000 per child per year towards qualifying childcare.

Parents can use it on a wide range of registered childcare, including:

  • childminders
  • nurseries
  • breakfast clubs, after school clubs and holiday clubs.

Please visit www.childcarechoices.gov.uk  to find out more information and how to apply.

The tax treatment for low emission cars

With global warming and targets for reducing pollution the government is to encourage more people to use low CO2 emission or zero emission vehicles and there are a number of tax measures that incentivise that behaviour. However, those tax measures are not all perfectly aligned, as different emissions thresholds and cut-off dates apply for capital allowances, leasing costs, employee benefits and optional remuneration arrangements (OpRA).

This article outlines the various tax incentives for low emission vehicles as they apply from 2019/20.

Capital allowances

Cars do not qualify for the annual investment allowance (AIA), even if they have low CO2 emissions. However, the cost of acquiring any commercial vehicles can be claimed under the AIA, so it is important to determine whether a vehicle qualifies as a commercial vehicle for tax purposes. The AIA cap is £1m for purchases made in 2019 and 2020, and will revert to £200,000 on 1 January 2021.

Until 1 April (5 April 2021 for income tax) a low or zero emission car can qualify for a 100% first year allowance (FYA) if its CO2 emissions do not exceed 50g/km and the car is purchased new and unused (s45D, Capital Allowances Act 2001 (CAA 2001)). A similar 100% FYA applies for zero emission vans, where the vehicle is purchased new and unused before 1 April 2021, or 5 April 2021 for income tax (s45DA, CAA 2001).

Cars with CO2 emissions of between 51g/km and 110g/km are added to the main pool for capital allowance purposes, so attract an annual writing down allowance (WDA) of 18%. Cars with CO2 emissions exceeding 110g/km must be allocated to the special rate pool, where the WDA is 6% from 1 April 2019, from 6 April for income tax (s56, CAA 2001). A hybrid rate of WDA between 8% and 6% will apply for accounting periods that straddle 1 or 6 April 2019.

Benefits-in-kind

The percentage of list price of a company car which is taxed as a benefit is determined by the CO2 emissions of the vehicle. For 2019/20 low emission cars (up to 50g/km) are taxed at 16% of list price, or 20% for diesels. The list price includes the cost of any optional accessories but does not include any discount negotiated with the dealer, so the taxable list price may significantly exceed the actual amount paid for the vehicle.

Hybrids encouraged

From 6 April 2020 the policy is switched round to once again encourage the provision of electric cars and hybrid vehicles. The appropriate percentages for cars with CO2 emissions of up to 50g/km will consider the range for which the car can be driven using only electric power (as shown in the table).

The tax year 2020/21 will be the sweet spot for buying an electric company car, when 100% FYA can be claimed by the purchaser and the employee will be taxed on only 2% of the vehicle’s list price. However, government policy regarding electric company cars beyond 2021 remains uncertain.

Leased cars

Where cars are leased the amount of deduction which would otherwise be allowable is reduced by 15% if the car has high CO2 emissions. In this case the threshold for ‘high’ is aligned with that for capital allowances, being over 110g/km for leases commencing on or after 1 April 2018 (6 April 2018 for income tax).

Electric vans

The taxable benefit for having the private use of an electric van is gradually being aligned with that for ordinary vans. In 2019/20 the taxable benefit for using a normal company van is £3,430 and the benefit for an electric van is 60% of that figure: £2,058. In 2020/21 the electric van will be taxed at 80% of the benefit for a normal van, and in 2021/22 at 90% (s115(1C), Income Tax (Earnings and Pensions) Act 2003). There is no taxable benefit at all if the van is only used for business journeys and ordinary commuting.

Cost of charging

Where the employer pays for the cost of charging the company-provided electric vehicle there is no taxable fuel benefit for the driver, as electricity is not classified as a fuel for the car or van benefit regulations.

Where the driver of the electric vehicle pays for the electricity to power it, either from their domestic supply or by charging at a roadside station, the employer may reimburse the employee for that cost. With a roadside charge it is easy to see what the total cost is, but it is not so easy to calculate the cost per mile when charging from a domestic supply.

This problem has been solved from 1 September 2018, as the employer can pay the company car driver 4p per mile, to reimburse them for the cost of the electricity used for business journeys, with no tax implications. This rate only applies to company-owned electric cars, not to private vehicles.

Where the employee uses his or her own electric car for business journeys the company can pay the normal tax-free mileage allowance to the individual of 45p per mile for the first 10,000 miles driven in the year, with additional business miles reimbursed at 25p per mile. The driver may also claim the passenger rate of 5p per mile for every person he or she takes on the same business journey.

Dividend for 2019/20

Another reminder to you all that there is now tax on dividend! This has been the case since 6 April 2016. The tax-free dividend allowance is £2,000 from the 2018/19 tax year and beyond.

What I have done is gone through some examples below of how much dividend you can take while remaining in the basic rate threshold of 7.5% tax on the dividend. The below assumes no other income besides salary and dividend. 

Remember dividend is the last income item to be taxed, therefore, if you have property rental income or foreign income then you would have to reduce your dividend by the total of the other income in order to remain in the basic rate threshold.

Remember you should yourselves be aware of how much dividend you are taking out of the business (see point 3 below). We have a dividend tax calculator on our website which you can use to work out your tax. 

You can take more than the basic rate threshold in dividend and the below table is just given as guidance.

I have listed out below some useful hints and tips.

  1. As a basic rule move 20% of your revenue into a separate business savings account and use this to pay your corporation tax. The remaining 80% is available for you to take out in a combination of reimbursed petty cash expenses, salary and dividend.
  2. You must maintain enough money in the company account to pay your corporation tax. Cash and accounts work on two separate principles. Cash works on an actuals basis. Accounts work on an accruals basis meaning that at your year-end there will be liabilities which are outstanding (the biggest of which is corporation tax) and the Company must hold enough money to pay these liabilities. If it doesn’t then effectively you have taken the ‘would be corporation tax’ money out as a Directors Loan.
  3. Take out dividend separately to salary and reimbursed expenses. You should do separate transfers for salary, dividend and reimbursed expenses using the correct reference for each. DO NOT take lumpsums to account for all three; salary, dividend and reimbursed expenses.
  4. If your tax liability through self-assessment is greater than £1k then HMRC will ask you to pay next year’s tax in advance via two payments on account, one due on 31 January and the other due on 31 July.

 

 

Banner Associates Dividend

Tax-Free Childcare

The planned abolition of the childcare vouchers scheme for new claimants has been deferred for 6 months.

It was announced in George Osborne’s last Budget two years ago that the Childcare Vouchers scheme would be replaced with Tax-Free Childcare. The two have similar goals, but radically different structures which have created winners and losers. The then Chancellor said that the new scheme would replace the voucher system (technically “Employer-supported Childcare”) from April 2018, although pre-existing claims would continue to be met.

HMRC started to roll out the new scheme in April 2017 and immediately ran into complaints about its Childcare website, eventually forcing the government to make nearly £1m of payments in lieu to parents. After this somewhat inauspicious start, the scheme was gradually put in place, with all working parents with a youngest child under the age of 12 becoming eligible on 14 February 2018. With that point reached, it looked as if the closure of the voucher scheme was on course for the end of the tax year.

It was therefore something of a surprise that in a debate on Universal Credit on 13 March (Spring Statement day), the education secretary, Damian Hinds, revealed that “we will be able to keep the voucher scheme open to new entrants for a further six months”. The news came in a response to a question from a DUP MP, following a cross-party letter to the Chancellor asking for the voucher scheme to be kept open.

The HMRC childcare choices website now says that the voucher scheme will “remain open to new joiners until October 2018”. However, as many employers have been working to a 5 April deadline for closure, there may be problems for employees making fresh claims in 2018/19, only to find the scheme has closed, as planned.

This is not HMRC’s finest hour and, given the timing of the announcement, the phrase “a good day for burying bad news” does spring (sic) to mind.

Dividend for 2015/16 and 2016/17

As most of you will probably know the dividend tax rates are going up from 6 April 2016.  The dividend tax credit of 10% and the dividend tax rate of 10% are being removed and a new £5,000 tax free dividend allowance introduced and a new basic rate tax on dividend of 7.5%. We go through an example of what this means below.

Example 1

You take a salary of £12,000 per annum and take dividend up to the basic rate threshold (for 2015/16 this is £27,300 in dividend). Your total tax on your salary is PAYE of £280 and NI of £472.80 and NO tax on your dividend.

In 2016/17 i.e. after 6 April 2016 if you continue to take a salary of £12,000 per annum and take dividend up to the basic rate threshold again (£31,000 for 2016/17). Your total tax on your salary would be PAYE £200 and NI of £472.80 (the Company would also pay Employers NI of £536.54) and £1,950 in tax on your dividend.

2015/16

Firstly we advise that you take out more dividend this year before 5 April 2016. You should retain enough funds in the Company bank account to pay your corporation tax (just look and see what you paid last year in corporation tax as a guide and keep this in the company bank account). There would be tax to pay on the additional dividend at 25% but this is a lower rate than 32.5% which is what the rate of tax will be from 6 April 2016.

We remind you below of the new dividend tax rates;

  2015/16                                                 2016/17

Basic                            10% + 10% tax credit                            7.5% with £5,000 tax free

Higher                                     25%                                                               32.5%

Additional                               37.5%                                                            38.1%

 

Childcare Vouchers

 

If you have children who are at Nursery then you may want to consider taking childcare vouchers from your limited company.  You can take tax free up to £243 per month in childcare vouchers which will help towards the cost of your childcare. In order to take advantage of this you must sign up with a childcare voucher provider. Generally speaking our clients use one of the two providers Edenred – https://www.edenred.co.uk/  or Abacus – https://www.abacusvouchers.co.uk/ . You must engage with the childcare voucher provider directly and pay them from your business account. Thereafter the childcare voucher provider will pay the Nursery.