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HMRC internal manual

Employment Income Manual

Benefits: exemptions: childcare and childcare vouchers supported by the employer: rules from 6 April 2005 to 5 April 2011: the exempt amount

Section 318A ITEPA 2003

The exemption for arrangements under which the employer engages with a commercial nursery or approved child carer to provide care for the children of employees is limited to £55 per week (£50 per week in year 2005-06). If the cost to the employer of providing the childcare exceeds £55 per week (£50 per week in year 2005-06) the excess is subject to income tax and NIC.

An employee is only entitled to one exempt amount per week even if they have two or more children receiving childcare. However, if two employees have responsibility for the same child each employee can receive a weekly exempt amount. See the example below.

An employee is only entitled to one exempt amount in each tax week in respect of the restricted exemptions for employer-supported childcare.

For example, if in one week the employer offers a place to the employee’s child in an after-school club - valued at £55 and provides a £55 voucher that may be spent on qualifying childcare for a younger child in a local nursery, the employee will have one exempt amount (£55) and will be chargeable to income tax and NICs on the benefit of the other £55.

Meaning of “qualifying week”

The exemption is limited to £55 per week (£50 per week in year 2005-06) for each qualifying week in a tax year. A “qualifying week” is defined as a “tax week” in which care is provided in circumstances that satisfy the relevant conditions:

Condition A - the child (see EIM22020)

Condition B - the childcare (see EIM22030)

Condition C - availability of the childcare scheme to all employees generally (see EIM22015)

A different definition applies for childcare vouchers. Section 270A(7) defines a “qualifying week” for childcare vouchers as a tax week in which a qualifying childcare voucher is received. This means that childcare vouchers can be stockpiled and used to pay for qualifying childcare when required - for example, during the school holidays. See EIM16057.

Meaning of “tax week”

A “tax week”, for the purposes of these rules, is a period beginning on the first day of a tax year and recurring every seventh day after that. This means that the last day of the tax year (or last two days in a leap year) attracts an exempt amount if the above conditions are satisfied.

The rules stipulate that childcare must be provided in the qualifying week in order to receive the exempt amount. A nursery may require a retainer payment for a week when the child is, say, away on holiday. If the employer pays the retainer but no care is provided in the week then the £55 exemption is not due and the benefit is chargeable to income tax and NIC.