HM Revenue & Customs (HMRC) has issued new guidance on reduction in tax relief from 6 April 2011 for employers who provide childcare schemes.

There are two changes:

• To restrict the tax relief for employer-supported childcare to the basic rate of income tax.

• To prevent employers providing childcare via salary sacrifice arrangements which would bring the employee’s pay below the National Minimum Wage (NMW).

“Employer-supported childcare” means employer-contracted care (where the employer arranges directly with a registered provider to offer qualifying childcare to employees) and childcare vouchers provided to the employee by the employer for qualifying childcare. The changes do not affect the provision of workplace nurseries, which continues to be tax-free.

The previous rule was that qualifying employer-supported childcare was exempt from income tax and disregarded for NIC for the first £55 a week (so 50% taxpayers get relief at 50%). This rule still applies for those already in an employer childcare scheme at 6 April 2011.

The new rules apply from 6 April 2011, to employees joining a scheme on or after that date. There are some quite complicated rules about when an employee is regarded as already in a scheme at 6 April 2011, and the guidance explains these.

The new restriction is achieved by reducing the weekly exempt (or disregarded) amount: this is £55 for basic rate taxpayers (i.e. no change from before), £28 for higher-rate and £22 for additional-rate taxpayers. The result is that all employees get tax relief of £11 a week.

To decide which exempt amount to apply, the employer has to make an assessment of each employee’s earnings at the start of the year. Indeed, failing to do this will invalidate the scheme for tax relief purposes. There are detailed rules about what earnings and tax allowances to include in making this assessment, which are explained in the guidance.

Where the employer operates a salary sacrifice scheme for childcare provision, employees cannot take part if it would reduce their remaining earnings below the NMW. Employers are allowed to exclude such employees from the childcare scheme without affecting the availability of tax relief for others in the scheme (the general rule being that the scheme must be open to all employees).