Employer supported childcare (ESC)

The current limit on the amount of exempt income associated with childcare vouchers and directly contracted childcare for employees in an ESC scheme, is £55 per week. From 6 April 2011 this will be restricted in cases where employees join a scheme and their earnings and taxable benefits are liable to tax at the higher or additional rates.

At the beginning of the relevant tax year, employers will be required to estimate the level of employment earnings that their employees are likely to receive during that year (ignoring potential bonus and overtime payments, but including other known taxable benefits). Income for the purpose of the calculation will be reduced by the personal allowance as shown on the individual's tax code for the relevant employment.

If the level of income is within the basic rate band, the employee will be entitled to relief on up to the full £55 per week, but if it exceeds the 50% rate threshold for the year, the employee will be entitled to relief on just £22 per week; and if it is between the above two bands the employee will be entitled to relief on £28 per week.

Anyone already in a scheme by 5 April 2011 will not be affected by these changes as long as they remain within the same scheme. The existing tax and NICs exemptions for workplace nurseries will remain.

Higher and additional rate taxpayers looking to join an employer-supported childcare scheme should do so before 5 April 2011 to avoid the impact of this provision.