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Beware: Nursery Fees Are NOT A Tax Deductible Business Expense

That time of the year is here again when the self-assessed tax return appears on everyone’s “To Do” list and we all start digging out those expenses receipts.

Many people who re-enter the workplace, after taking time out to care for young children, do so through the sole trader route, setting up in business to suit their new life circumstances. This can open up a whole new minefield of tax obligations and benefits which could take a tax accountant to help clear for you. Here’s our advice on childcare business expenses.

Are Nursery Fees and Childcare Tax Deductible?

If you’re one of those entrepreneurs who’s paying for a nursery place in order to free up time to work on your business, you may be recording all of your nursery costs to claim as legitimate business expenses. Unfortunately, nursery fees aren’t legitimate business expenses and aren’t tax deductible.

Are you at risk of prosecution?

Even though child care eats into your profits, as far as the taxman is concerned, nursery fees paid by a sole trader aren’t exclusively for the purpose of your business, so they’re not tax deductible.

At Black and White Accounting we’re concerned that many sole traders could be falling foul of tax regulations because of this misunderstanding, putting themselves at risk of prosecution.

However, the taxman can help you

Paying for childcare is a real issue for the parents going self-employment. However, there are ways to get help with child care costs, so keep hold of your receipts.

Child tax credits

As a sole trader, if you’re income is low enough and you work enough hours, you may meet the criteria to apply through the Working Tax Credit system for help with your child care costs.

Tax-free Childcare

From 21st April 2017, the government introduced a new scheme called Tax-free Childcare, under which parents can apply for payments to cover 20% of their childcare costs.

It’s called the Tax-free Childcare Scheme because this is effectively a tax rebate for anyone who pays the basic 20% band of income tax.

Parents pay money into an account with a childcare voucher provider and the government will top it up, so if you put £80 into your account, the government puts in another £20.

The government contributes up to a maximum of £2,000 per year per child, or up to £4,000 if the child is disabled.

The scheme covers the whole UK and is open to parents of children under the age of 12, or under 16 if they’re disabled. The scheme will be expanded to include children up to the age of 12 by the end of this year.

To be eligible for Tax-free Childcare, you must:

  • Be working, and if you have a partner they must be working too. However, if your partner can’t work because they’re disabled or caring for a disabled person, you are still eligible.
  • Be employed or self-employed basis and have an income of at least £120 per week, though an exception is made for a business start-up period.
  • Not earn more than £100,000 a year, neither must a partner.

You can apply by setting up an account on the government’s childcare choices website. If you have problems with your Tax-Free Childcare account, call the childcare service helpline on 0300 123 4097.

What if I’m in another scheme?

If you’re already using Employer Supported Childcare schemes, you can continue using it but you can’t use both childcare vouchers and Tax-free Childcare together.

If you get tax relief on the costs of childcare at a workplace nursery, this won’t change.

You can’t use the Tax-free Childcare Scheme if you’re already receiving Tax Credits.

Need more advice?

If you’re working for yourself, you’ll have your own unique circumstances, so if you’d like more advice about your tax liability and how the Government could be helping you, contact Black and White Accounting on 0800 140 4644.

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