Are you at risk of losing tax-free childcare?

The client

A new partner at a long-established GP practice in Kent was at risk of a £4,000 claw-back relating to the government’s tax-free childcare scheme.

The dilemma

The tax-free childcare scheme was introduced in April 2017 to help working parents fund childcare costs. Earnings for the year must remain below a threshold of £100,000 and are assessed against adjusted net income. For a GP partner, this includes their partnership profit share after allowable expenses plus any external income; less pension contributions and donations where Gift Aid is claimed.

If a parent earns more than £100,000 during the tax year, the tax-free bonus of up to £2,000 per child per year can be clawed back and future tax-free bonuses denied.

“This is exactly the situation that one of our clients found themselves in for the 2021/22 tax year,” said Abi Newbury, managing director at AISMA accountancy firm Honey Barrett, who led the case.

The issue became apparent during the practice’s annual accounts meeting with Honey Barrett. “Although we request personal tax information from all partners well in advance of the annual accounts meeting, this particular partner was new to the practice and she had not provided this information to us,” says Abi Newbury.

“For the accounts meeting we prepared estimates of her tax and pension liabilities. However, as we didn’t have her full personal tax details, we were unaware that she had been participating in the tax-free childcare scheme. Consequently, and with her profit share for the year exceeding £100,000, her dilemma only came to light during the meeting.”

Already facing hefty tax bills in relation to the commencement of the partnership role, the partner was, unsurprisingly, daunted at the prospect of also having £4,000 of tax-free childcare clawed back (and losing access to the scheme going forwards).

Action required

“Client care is at the heart of everything we do, and anything we can do to ease the worries of our clients is paramount to the service we provide,” says Abi Newbury.  A plan was immediately put into place to try to mitigate the situation.

For practices with a non-31 March year-end, it is usual for accountancy firms to calculate the partners’ profit shares and estimated pension liabilities for the year ahead. “Doing this led to us identifying an underpayment of NHS Pension Scheme contributions. We recommended that the new partner accelerate the payment of these contributions, prior to 5 April 2022, in order to bring her adjusted net income below the £100,000 threshold for the 2021/22 tax year, thus preserving her tax-free child care for the year,” says Abi Newbury. “It also meant she retained her eligibility for tax-free childcare in 2022/23.”

The conclusion

A great deal of worry and money was saved for the GP in question by the team at Honey Barrett. “This is all part of the normal level of service and projections that we provide our clients,” says Abi Newbury. “The review of pension balances, and consideration of accelerated pension payments can have many benefits, and not just in terms of potential income tax savings.”