Changes had previously been announced to the tax breaks for employer-supported childcare and draft legislation has now been issued covering the changes which take effect next year.

There is currently a £55 per week limit on the amount of exempt income associated with childcare vouchers and directly contracted childcare for employees in an employer’s scheme. From 6 April 2011 this will be restricted in cases where an employee joins a scheme and their earnings and taxable benefits are liable to tax at the higher rates. Employers will be required, at the beginning of the relevant tax year, to estimate the level of employment earnings that their employee is 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 £55 per week - exceeds the 50% rate threshold for the year, the employee will be entitled to relief on £22 per week - is between the above two bands the employee will be entitled to relief on £28 per week. Where an employee is employed part way through the tax year their income will be grossed up to a full year. Anyone in a scheme by 5 April 2011 will not be affected by these changes as long as they remain within the same scheme.