From April, "the amount of tax-free childcare that higher-rate taxpayers can receive was cut by up to half", says Tax Tips & Advice. But thanks to "sloppy drafting of the rules", there is a way for higher-rate taxpayers to receive the full amount.
Basic-rate (20%) taxpayers can receive up to £55 a week in taxfree childcare vouchers, which represents a tax saving of £11 per week (£55 x 20%). So that higher-rate taxpayers don't make a tax saving greater than £11, the new rules reduce the amount of tax-free childcare vouchers they can receive.
Thus Janet, who earns £60,000 a year as an employee, receives only £28 worth of vouchers (£28 x 40% is £11). But higher-rate taxpayers can do better. Take John, manager of Acom Ltd.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
He earns £40,000 in salary and benefits in kind on top of profit from his own business of £20,000 a year. "Even though he pays tax at the higher rate on his total income, because he is a basic-rate taxpayer on his salary and benefits, the full £55 of childcare vouchers are tax free". In other words, his total income is the same as Janet, but "he's better off than her by £11 a week because the full £55 is exempt" (£55 x 40% is £22).
