Can I Pay for Childcare Through My Business?

The juggling act of balancing a career and family life is a challenge for many parents. For working parents, childcare isn't just a necessity - it's a pivotal component of their daily lives, enabling them to pursue their careers while ensuring their children are cared for. In this guide, Nannies Matter outlines how UK businesses can help to cover childcare costs for workers, potentially easing the financial burden on employees and opening up new benefits for employers.

Childcare costs in the UK

Nurseries, day-care centres, private nannies and childminders all offer different fee structures, benefits and drawbacks. The choice of childcare can be influenced by factors such as work schedules, income and personal preference, but when can these costs be mitigated through your business?

Under HMRC regulations, business expenses must be "wholly and exclusively" for the purposes of the business, which doesn't typically cover employee childcare. Despite this, there are structured ways in which a business can contribute towards childcare, such as through tax-efficient childcare schemes.

While the Childcare Voucher Scheme is no longer available to new applicants, it still benefits existing participants. More prominently, the Tax-Free Childcare Scheme offers up to £2,000 per child annually, which both self-employed people and employees can take advantage of. This is not exclusive to employers but there are ways they can support its implementation, as we will explain below. There's also the option for businesses to directly contract with childcare providers to offer care at or near the workplace.

Benefits of paying for childcare through your business

By supporting childcare costs, businesses can benefit from tax reductions and National Insurance savings. For employees, this support can be a significant draw, potentially increasing job satisfaction, loyalty, and the company's appeal in the job market.

How limited companies can support workers with childcare costs

For employers operating through a limited company in the UK, support with childcare costs can be an attractive benefit for employees. Not only can this enhance the company's overall offering to workers - it can potentially yield financial advantages for both parties. Here are the ways a limited company can assist with childcare costs:

• Salary sacrifice schemes: in this arrangement, an employee agrees to a reduction in their salary in exchange for the company paying an equivalent amount towards their childcare. This must be executed under a formal agreement and has implications for both the employer's and employee's National Insurance contributions. It's a tax-efficient way to provide childcare benefits, as the sacrificed portion of the salary comes from the employee’s gross pay and is therefore exempt from tax and National Insurance up to certain limits.
• Tax-free childcare support: although the government's Tax-Free Childcare scheme is directly accessed by parents, employers can play a role by providing information and assistance in setting up the necessary accounts. For every £8 a parent pays into their childcare account, the government will add an extra £2, up to £2,000 per child per year, or £4,000 for disabled children.
• Workplace nurseries: if a company provides workers’ children a place in a nursery that it runs, either on its own or in partnership with a nursery provider, the value of the benefit may be exempt from tax and National Insurance contributions for those employees. This can represent a substantial saving for employees, while the costs of providing the nursery can be deducted from company profits, reducing Corporation Tax.
• Direct contract with childcare providers: a limited company can also contract directly with external childcare providers, such as Nannies Matter. By doing so, the company can negotiate favourable rates and reserve childcare slots specifically for their employees.
• Childcare vouchers: if employees are already part of an existing Childcare Voucher scheme, limited companies can continue to provide support through this method. Although this would be closed to new entrants, it remains a tax-efficient way to pay for registered childcare for those who are part of the scheme.
• Informing and assisting employees: apart from these direct methods of support, companies can assist their employees by providing information on available childcare options and how to claim government support. This can include advising on Tax-Free Childcare accounts and helping employees understand how they can maximise their benefits under the existing schemes.

Implementing any of these options requires careful planning and compliance with tax laws. It's essential for businesses to work with a financial advisor or accountant specialising in employment benefits to ensure that any childcare support provided is beneficial and compliant. Regular reviews of the schemes are also necessary to ensure that they continue to meet the needs of both the company and its employees, and to adjust to any changes in tax legislation.
Working with a nanny agency can help business owners to understand how to combine the different aspects of childcare schemes, to ensure that the care they provide is beneficial to the children involved.

For sole traders and partnerships

Sole traders and partnerships in the UK may not have the same opportunities as limited companies to provide tax-efficient childcare support directly through the business, but there are still options available that can benefit both the business owners and their employees:

• Tax credits and government support: while sole traders and partners cannot offer salary sacrifice schemes, they can still advise their employees on individual entitlements such as Working Tax Credits or Universal Credit, which can include a childcare element. This support can cover up to 85% of childcare costs, depending on the claimant's circumstances, and is paid directly to the parent or guardian responsible for the child.
• Tax-Free Childcare scheme: sole traders and individual partners can participate in the Tax-Free Childcare scheme, which is not directly related to the business but can significantly reduce their personal childcare costs. This scheme is available for self-employed individuals, which can be beneficial for sole traders who can receive up to £500 every three months (£2,000 a year) for each child to help with the costs of childcare.
• Personal pensions and NI contributions: although sole traders and partnerships cannot directly pay for childcare before tax, they can make personal pension contributions that reduce their taxable income. This, in turn, may increase the amount of government support they can claim for childcare. Additionally, making NI contributions through their business can help in building entitlement to certain benefits, which is a long-term consideration for any business owner.
• Flexibility in work arrangements: sole traders and partnerships might offer flexible working arrangements to employees, such as hybrid or remote working, which can reduce their overall childcare needs. While this doesn't reduce the cost of childcare, it can lessen the number of hours that childcare is required, effectively reducing the expense.
• Accounting for childcare as a business expense: for sole traders and partnerships, the direct costs of childcare cannot typically be charged to a business account in a tax-efficient manner. However, if a sole trader or partner needs to attend training or a business meeting and requires childcare to cover this specific instance, the cost could potentially be considered a business expense. This should be discussed with a tax professional to ensure compliance with HMRC rules.

Integrating childcare support requires careful planning. It's advisable to consult with a tax specialist or accountant to navigate the complex tax implications. Once a plan is in place, clear communication with employees and meticulous record-keeping will help ensure compliance with HMRC requirements.

Work with Nannies Matter

If you're considering offering childcare support within your business, we encourage you to contact us for advice. We offer bespoke nanny services tailored to your specific needs, and can help you to ensure that both you and your employees come out ahead. For more information, call us today on 0800 121 4881, or fill out an online contact form and we will be in touch.