Childcare Vouchers and the Basic Earnings Assessment 2012/13Monday, March 19th, 2012
As we approach the end of one tax year and the start of another, it is relevant to remind payrollers of their administration task which is the Basic Earnings Assessment (BEA). As you will remember, the tax exemption conditions changed at the start of tax year 2011/12, which affected employees who join / joined an employer-supported or childcare voucher scheme on or after 06 April 2011. Therefore, it is quite likely that we will have two categories of employees in our childcare schemes:
Pre-06 April 2011 Members
For as long as an employee remains a scheme member, where vouchers are first provided on or before 05 April 2011, employees are unaffected by the new restrictions and continue to benefit from the £55 per week tax and NICs exemption. This equates to £243.00 for a monthly payroll, as the exempt amount is calculated as if there are 53 weeks in the tax year.
If the value of vouchers exceeds the exempt amount, the excess should go on the P11D for tax purposes (box C) and through the payroll for Class 1 NICs.
On or after 06 April 2011 Members
Instead of the single £55 exempt amount that applies for existing scheme members, new scheme members from 6 April 2011 will have an exempt amount that relates to their marginal rate of tax. The restrictions are aimed at employees who pay tax at the Higher 40% rate or the Additional 50% rate. The effect of the restrictions is to ensure that such higher-paid employees do not receive more from the tax exemption in actual monetary terms than employees who pay tax only at the Basic 20% rate.
To achieve this, the exempt amount is:
- £22 per week, £97 per month, £1166 per annum, for employees with a ‘relevant earnings amount’ that is estimated to exceed the 50% Additional rate threshold for the tax year,
- £28 per week, £124 per month, £1484 per annum, for employees with a ‘relevant earnings amount’ that is estimated to exceed the 40% Higher rate threshold but not the 50% Additional rate threshold for the tax year,
- £55 per week, £243 per month, £2915 per annum, otherwise.
A Basic rate employee receiving vouchers worth £55 has tax relief of £11 (£55.00 * 0.20). Lower weekly limits apply for taxpayers with marginal tax rates of 40% and 50% to ensure they also have tax relief of approximately £11 (40% of £28 = £11.20, 50% of £22 = £11).
The decision as to which weekly exempt amount applies to each new scheme member is made by the employer. This was accepted in the draft legislation Explanatory Notes as the principal ‘administrative burden’ with the new tax restrictions. To ascertain which of the above exempt amounts applies to the employee, the employer must carry out the BEA to determine the ‘relevant earnings amount’ which, in turn, will give the employee’s marginal rate of tax. This is explained below:
The Basic Earnings Assessment
In many cases, an employee’s marginal rate of tax can only be correctly determined after the end of a tax year, when the employee’s total earnings for the year are known. However, which of the three exempt amounts apply to any employee has to be decided in advance. To do this, employers must carry out the entirely artificial calculation called the Basic Earnings Assessment (BEA). The function of this is to estimate the employee’s ‘relevant earnings amount’, from which the exempt amount can be ascertained.
There are no exceptions to the requirement to perform the BEA when an employee joins an employer-supported childcare scheme, even in businesses and business sectors with a high turnover. In addition to this being performed at the time a new scheme member enters the scheme, it must be re-performed at the start of the following tax year.
The BEA is not based on payments that have been made in the past, either in the present employment (e.g. on the previous year’s P60) or with a previous employer (as quoted on a P45). Rather, it looks ahead to the whole of, or the remaining part of, the tax year in question and is made on the basis that the employee’s current contractual circumstances will continue unchanged for the rest of the tax year. Therefore, for example, if it is already known that the employee is leaving or will be redundant, that does not make any difference to the assessment.
An employee’s ‘relevant earnings amount’ for a tax year is defined as:
Earnings and Benefits LESS ‘Excluded Amounts’
Earnings and Benefits
The BEA should include all payments due under the employee’s contract of employment, but not any discretionary payments. For example:
- Basic pay or salary
- Guaranteed overtime that is paid whether or not it is worked (but not overtime that is only paid if it is worked)
- Shift allowances
- Guaranteed bonuses (but not performance-related or discretionary bonuses)
- Contractual commissions
- Londonweighting or other regional allowances
- Qualification payments, e.g. first-aid allowance
- The P11D value of any taxable benefits which the employer has agreed to provide the employee (medical insurance, car etc)
- Occupational pension contributions
- Payroll giving donations deducted from gross pay under the net pay arrangement
- Expenses payments that are included in the payments above but that may be paid without deduction of tax
- Relocation-related removal expenses that are taxable earnings from the employment (up to £8,000)
- Where Earnings and Benefits total less than £150,000, “the amount of any allowance under Part 3 of [the Income Tax Act 2007] to which the employee is shown to be entitled in the code determined in accordance with PAYE regulations for use by the employer in respect of the employee for the tax year”, namely
- the personal allowance (under age 65)
- the personal allowance (age 65 to 74) (reduced as appropriate where earnings exceed the income limit)
- the personal allowance (age 75 and over) (reduced as appropriate where earnings exceed the income limit)
- the blind person’s allowance
If the employee starts mid-way through the tax year, the first BEA will include only the pro-rata figures to the end of the tax year, however, needs to be ‘scaled up’ so that the resultant figure gives an annual figure, rather than just part of a year.
The resulting total from the Assessment applies for the whole of the tax year. It is based on the employee’s circumstances at the time it is calculated and may not be changed during that tax year to reflect any changes in the employee’s earnings. Consequently, it would not be inconsistent or incorrect for an employee to be entitled to an exempt amount of £55 per week for the whole tax year based on an Assessment of earnings at the start of the tax year but, later in the year, to start paying tax at 40% due to a promotion. This situation would only be picked up when the BEA is done again at the start of the following tax year.
The way in which each employee’s BEA was determined becomes a part of the employer’s payroll records and they must be retained and produced in the event of a compliance check. There is no defined format for the records – they must contain enough information to show how each assessment was calculated.
Using the BEA Relevant Earnings Amount to Determine the Marginal Rate of Tax
Having determined each employee’s ‘relevant earnings amount’, the next step is to compare it with the income tax bands.
The two thresholds for 2012/13 are:
- £34,370 Basic rate limit, and
- £150,000 Higher rate limit
- £22 per week (£97 per month / £1166 per annum) will apply to employees with a ‘relevant earnings amount’ that is estimated to exceed the Higher rate limit for the tax year,
- £28 per week (£124 per month / £1484 per annum) will apply to employees with a ‘relevant earnings amount’ that is estimated to exceeds the Basic rate limit but not the Higher rate threshold for the tax year,
- £55 per week (£243 per month / £2915 per annum) for employees with a ‘relevant earnings amount’ at or below the Basic rate limit
Note that once the ‘relevant earnings amount has been established, it is used for the whole of the tax year and the exempt amount that has been determined will apply throughout the tax year as well.
It is also worth pointing out that, in addition to the employer’s responsibility to produce the BEA, it is also the employer’s responsibility to keep records. HMRC do not specify the format of the BEA, however, in a Compliance Audit, they will expect the records to show enough information to prove that the earnings have been assessed and the employee is getting the right amount of tax relief.