Rob Noble-Warren, founder of Independence Financial Planning, explains how the cost of childcare can be cut by an employer-run nursery
Lukas Clancy was having to work hard. The five-year-old publishing business he was helping to manage was not yet out of losses so his salary was being limited to £52,000 - no bonuses of course - and he and his wife were £3,000 down in cashflow every year. On the plus side, his wife was working with the Civil Service and her pension alone would cover £600,000 of the £1m they needed for financial independence.
However, their overdraft was mounting up. It was their children's daycare costs that were the problem - £12,000 a year for their nanny, from which they deducted PAYE and national insurance before paying her. Lukas was having to earn £25,000 to pay her £12,000. Was there any way of reducing the tax burden?
Actually, there was.
Tax credits would not help. Their joint income was over the £58,000 a year limit (see HM Revenue & Customs leaflet WTC2). A pity - the £210 a week (70% of £300) maximum for childcare costs would have almost solved their problem.
Daycare vouchers held out some small benefit. Lukas could be provided daycare vouchers from his employer and, although PAYE would be payable on everything over £600 a year, national insurance would not be. The trouble is, it was not a complete solution by a long way, and it was clumsy.
Vouchers can be used to pay for education, as long as the education concerned is not part of the state compulsory curriculum. Before you rush off to organise vouchers to pay for your child's extra tuition and ballet classes tax-free, however, bear in mind the care or education must be provided by someone who is within the definition of the Income Tax (Earnings and Pensions) Act 2003 s318C(2) - in other words, is licensed for daycare.
Maybe you are wondering if someone in the family could be that licensed carer, and the answer is yes - but they must be looking after at least one person who isn't in the family as well. £600 of the vouchers every year would be tax-free, and the rest would be taxed as income (but no national insurance).
Lukas was faintly interested but the idea of using vouchers to pay for the music teacher tax-free was not addressing his main need. He needed something that would put £3,000 a year back into his pocket. In fact, the sooner the better because his company was being run so badly he had already negotiated a management buyout (MBO) on one part of it, and was halfway through setting up his own business.
The final solution was to provide a daycare centre at work. But it was tricky to think through the political angles. He could get his daycare costs provided by his employer, and that would be tax-free, if all the legislative conditions were met.
Those conditions are, first, that all employees can join - in other words, that the daycare centre is open to all; second, that the employer actually engages in running and managing the centre; and third that there is no element of salary sacrifice by Lukas.
Given that Lukas was in negotiation for an MBO, his employers would treat any request to open a daycare centre just for him with less than excitement. If he then explained the employer would need to pay extra for the care cost, cut neither his salary nor non-existent bonus and provide the same to all employees, the employer would probably conclude it was a good thing this man was leaving. So that was a dead end.
Except - and here was the key - the requirement in the law to provide daycare for all does not apply under a separate condition that says an employer could use the daycare centre to provide daycare for someone working for another employer, even if they all work at the same location.
So Lukas's new company, which had been formed to house the MBO, opened the daycare centre. It was open to all employees of the new company - which was Lukas and his wife. The daycare centre was opened in a room in the building in Richmond where Lukas worked for his current employer, while the details of the buyout were being negotiated.
Since his salary in his new company was currently not established, there was no question of him having to give up salary for the benefit of the daycare, so HM Revenue & Customs would presumably be happy there was no salary sacrifice.
The terms of the buyout would be that a part of the business would be shunted out to the new company, and Lukas would eventually hop from one employer to his own company. In exchange for his employer's co-operation, Lukas permitted them to nominate any other employee of theirs to join his scheme, which they then regarded as another benefit to keep the employees they wanted.
And after all this, the effect was that Lukas had his £12,000 a year nanny cost shifted to his own company, and made this a tax deduction in his new company's books without also making it a benefit in kind for himself. Suddenly his cashflow worked out.
All he had to do now was make his new business work.
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