Tax advice of the week: A loophole in the childcare rules

published 22 June 2012

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.

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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).