New parents urged to seize nursery tax benefits

New parents who pay higher-rate tax are being urged to ensure they join their employer’s nursery voucher scheme before 6 April otherwise they could lose more than £1,000 tax relief due to planned cutbacks, says Baker Tilly.

Changes to employer supported childcare to be introduced on 6 April will mean that higher-rate taxpayers, both at the 40% and 50% rate, stand to lose at least half of the current annual relief offered if they have not joined an existing scheme before the new rules take effect. Tax relief is also available to parents using any form of ‘registered’ or ‘approved’ childcare.

Under measures announced in the June Budget, employees taxed at the higher and additional rate, who join a scheme after 6 April, will have their weekly allowable reliefs reduced from £55 to £28 and £22 respectively, as the the maximum relief for all taxpayers will be equalized to approximately £11 per week. Employees already part of a scheme will not see their relief affected by the changes.

Currently, higher rate tax payers can make annual tax savings of £1172 on childcare but those who join after April 6 2011 can expect to see their annual saving reduced to only £597. With two parents claiming, the amount of tax relief is worth more than £1,000.

Mark Collins, Head of the Employers Consulting Group at Baker Tilly, urges employers and employees to act now or they will lose their entitlement before the 6 April.

“Any employees who can join an existing scheme before 6 April will still be sure of obtaining tax relief at their top income tax rate – couples potentially avoiding a reduction of over £1000 a year in tax savings.”

“Employers who are considering setting up a new scheme or changing the terms of an existing scheme would be well advised to do so in time to enable all eligible employees to join in time. It will not be enough for the scheme to be in place: the employees must also have joined before 6 April.”