Why the future's bright for contractors with kids
Being a parent and running your own business or contracting empire can be tough, but the taxman is set to alleviate some of the cost and administrative pressures if you work for yourself and have children, writes Chris Conway, managing director of Accounts & Legal.
Currently, if you have the safety net of a regular salary from being in a full-time job you can pay for childcare vouchers out of your gross income.
But because childcare vouchers are only offered by employers, sole traders have always been excluded from this, although if you were a director of your own limited company you could set up your own scheme.
This would add to your administrative burdens however, as you’d first need to find a registered provider which could mean paying an arrangement fee or commission, and you’d then have to remember to claim against your corporation tax bill to get the reliefs.
Well from April 2017, anyone, no matter whether you are employed or self-employed, will be able to access help with childcare costs, providing a boost for many small businesses and taking away the hassle those working for themselves as limited company contractors used to face.
What are childcare vouchers?
Childcare vouchers are money paid out of your pre-tax income that can be put towards nursery fees as well as other costs you may want to cover for your children, such as music lessons.
Basic rate taxpayers get £243 a month and higher rate get £124. This system was known as employer-supported childcare and would have to be set up by a business, so if you are self-employed sole trader you cannot access this scheme, meaning you may end up paying more for childcare.
The government is aiming to change this with the launch of the Tax Free Childcare Scheme.
What is Tax Free Childcare?
The government has pledged that by the end of 2017 all parents – including sole traders and limited company contractors - will have access to individual accounts that they pay into and receive tax relief on payments that then go into to their childcare provider.
For every 80p you or someone else pays in, the government will top up an extra 20p; this is where the tax relief element comes in. The government will top up the account with 20 per cent of childcare costs up to a total of £10,000.
You will be able to apply for a tax free childcare account from a government website, which is yet to be launched. There are going to be some restrictions, unlike with the current scheme. Both parents will need to be working and you can only claim per child, whereas the existing childcare vouchers lets both parents get tax relief.
Who qualifies for this scheme?
Unlike the old scheme, this doesn’t have to be offered through employers, meaning sole traders can finally benefit and contractors running their own business have better choice.
The scheme will be available for children up to the age of 12. It will also be available for children with disabilities up to the age of 17, as their childcare costs can stay high throughout their teenage years.
To qualify, both parents will have to be in work, and each earning around £115 a week and not more than £100,000 each per year
To support newly self-employed parents, the government is introducing a ‘start-up’ period. During this, self-employed parents won’t have to earn the minimum income level.
If you ran a limited company you can already set up an existing childcare voucher scheme and receive the government relief against your corporation tax bill, but that means waiting until the end of your accounting period to get the relief back. So you could still benefit more from the new scheme as you get the government boost straight away.
Unlike the current scheme, you will be able to take any money you have contributed back out of the account, but you will lose the government contributions. This could help if you were having cashflow issues one month and needed to keep funds aside.
How else does the taxman support parents?
If you are self-employed you don’t get the same statutory payment entitlement to maternity or paternity leave.
There is no statutory payments scheme for new fathers who are self-employed as sole traders. You could only get paternity leave pay if you were a director of a limited company and set up your own scheme.
Similarly, while a limited company director can claim for maternity leave, as long as they have paid the correct national insurance and are paid a salary, if you are a new mother who is a sole trader, you may instead qualify for the Maternity Allowance.
You will be eligible if you have paid class 2 national insurance for at least 13 out of 66 weeks before your baby is due and if you have been self-employed for at least 26 weeks.
If you have recently moved from employment to self-employment you can count that time period towards the allowance. Self-employed mothers would be entitled to £139.58 a week or 90 per cent of your average weekly earnings (whichever is less) for up to 39 weeks
There is also help once your child is born. Currently, all parents get 15 hours of free childcare for 3-4 year olds. The government has been experimenting with some nurseries offering 30 hours and is now consulting on how it rolls that out nationwide from September 2017.
It would be available to parents earning the equivalent of 16 hours a week at the national minimum or living wage, and earning less than £100,000 a year.
Keep it in the family
Using government reliefs can help keep your cash flow under control. Also consider how you structure your business with your family members. Adding family members to the payroll is an old trick to minimise taxable profits, but now your family employees must justify their income in terms of the work they put into your business and their rate of pay.