Free childcare for company owners?

You’re an owner manager and your daughter is due to start nursery. You understand that working parents can get free childcare but a friend said this isn’t available if you only pay yourself dividends. Is this true and what can you do to qualify?

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Earnings

Much is made of the cliff-edge thresholds in the tax system, particularly for parents. For example, if one parent earns over £60,000 your child benefit is clawed back, and if one parent earns over £100,000 you’re not eligible for any childcare support. But what happens at the other end of the spectrum? In some cases, you need to earn more, not less, to qualify for state benefits.

Working parents

In England, working parents of children aged nine months to four years can get 30 hours of free childcare per week under the Free Childcare for Working Parents scheme. There are different schemes for Scotland, Wales and Northern Ireland.

Minimum earnings

To qualify for the scheme, you need to earn the equivalent of 16 hours per week at minimum wage. That’s £195.36 per week or £10,159 per year if you’re over 21. Only income from employment or self-employment counts towards the threshold. It doesn’t include dividends, interest or rental income.

You must take a salary of at least £10,159 per year to qualify for free childcare. Assuming you’re the only director/employee, your company will pay Class 1 NI as the secondary threshold is only £5,000. This amounts to £773.85 ((£10,159-£5,000) x 15%) which is a small price to pay for 30 hours of childcare per week. The net cost is actually lower because the company will get corporation tax (CT) relief.

Couples

Don’t forget that if you’re living together, whether you’re married or not, both you and your partner need to be working in order to qualify. Tip. If your partner doesn’t meet the requirements, either because they aren’t working or don’t receive certain benefits, e.g. carer’s allowance, your company can employ them. You’ll need to pay them at least £10,159 per year to qualify for free childcare.

Trap. To get the tax benefits of paying them a salary, e.g. a CT deduction, they must have a genuine role in the company. If it isn’t appropriate to involve them in the trade, you can give them administrative tasks, such as chasing unpaid invoices, preparing your books, etc.

NI break bonus

If you’re the sole director/employee, by hiring your partner your company will become eligible for the employment allowance. This reduces the company’s NI bill by up to £10,500. Therefore, by hiring your partner your company will pay less NI.

Example. Andy is a consultant operating via a limited company. He is the sole director/employee. He pays himself a salary equal to the personal allowance of £12,570. The company isn’t entitled to the employment allowance and so has an NI liability of £1,135.50 ((£12,570-£5,000) x 15%). Andy hires his spouse, Agnes, as a part-time secretary, paying her a salary of £12,570. The company now has two employees and is entitled to the employment allowance. No NI is payable, saving £1,135.50.

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