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HMRC Tax Guidance for Childminders Income and Expenses

November 15, 2018 12:00 pm
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Running your own business as a childminder

Being a childminder usually means you’re self-employed (a sole trader). As a sole trader, you are the sole owner and operator of your business and this means only you are responsible for paying any tax owed.

Some childminding businesses, particularly those that are registered as childcare on domestic premises, can be set up as a partnership or a limited company. If you set up your childminder business as a limited company, your liability is limited to what you (and possibly others such as an assistant/director) have invested.

If you set up a limited company, there is the benefit of having a protected company name from Companies House. Also, if you plan to retire in the future and hand your childminding business over, it’s much easier and more professional to do this if you are a limited company rather than a sole trader.

Running your own business as a sole trader means your income is from the ‘sales’ of the business, and not a wage or salary in the way it is when you work for someone else. For this reason, you need to know how to work out what tax is due to HMRC (Her Majesty’s Revenue & Customs) when you’re a childminder, and how to work out your expenses and profit so you can pay the right tax and National Insurance to HMRC.

There’s a £100 penalty if you don’t submit your tax return on time, with further penalties if your tax return is submitted more than three months late.

Although this sounds scary and can sometimes seem a little challenging, we’ve laid out some straightforward explanations to help you make sense of your tax situation as a childminder…

To make this a little easier we’ve split this article into six useful sections:

  1. Childminder accounting and tax overview
  2. Childminding costs and allowable expenses
  3. Useful resources to help you manage your business
  4. Working out your taxable profit
  5. Working out how much tax is due
  6. National Insurance Contributions (NICs)
  7. Useful links to HMRC information on childminders and tax

Remember, to run a childminding business you must register with HMRC as a sole trader.

Our popular printed government resource Childminder Agencies A Step-by-step Guide is a simple but very informative guide for organisations or individuals looking to set up a childminding business.

This guide contains everything you need to know, from how your business might be funded, to the registration and the application process. It is advised that this guide is kept to hand as it can also be referred to for practice support on continuous professional development and keeping children safe from harm.

1. Childminder Accounting & Tax Overview

Income/Turnover:

When you are a childminder your income is derived from the sales of your business. This is the total amount of money earned and normally includes payments from parents and any funding or grants you might receive for the provision of childcare. It is important to note that for accounting and tax purposes, income due to you on a certain date counts for that period – even if it has not yet been paid. The income from these sources added together makes up your turnover.

Our Childminding Contracts allow you to record the contracted hours for a child, payment rates and to note when payments are due. Making sure this document is accurate and updating it when necessary will help you when cross-referencing and filling out your childminding contract book. See below.

(Note – Childminding is exempt from VAT, so we do not include or refer to it further in this article)

2. Childminding costs and allowable expenses

Costs/Expenses:

It is not cost-free for you to provide childcare; any costs associated with providing the service that is incurred as part of your being a childminder are deductible from income/turnover before any tax due to HMRC is calculated.

Some of these costs/expenses are easy to identify (things you buy such as nappies or toys), and some of them are less easy to identify or calculate for the ‘business’ (such as household expenses like heating and lighting).

Pre-Tax Profit:

Once you have taken away costs and allowable expenses from your turnover, you can calculate your profit. This is the amount on which you will pay tax as a childminder – your taxable profit/income.

It is also important to remember that you’ll need to pay National Insurance Contributions, some of which you must pay at a flat rate and some of which you will pay depending on your total taxable profits.

Again, we’ll go into more detail on how to work out both tax due when you’re a childminder and NICs (National Insurance contributions)

Your Income/Earnings:

Once you’ve calculated your turnover, deducted your costs and expenses, and paid associated tax and NICs the total remaining is your net income or take-home pay.

Both the running costs of your childminding business and your day-to-day expenses need to be deducted from your income to work out your taxable profit. To make this easier for childminders, HMRC came to an agreement with PACEY (formerly the National Childminding Association) which includes easy-to-work out rates for household expenditure, motor expenses, cleaning costs, wear and tear, and food and drink and other small purchases.

Childminders can also make use of what HMRC call ‘simplified expenses’ for things like household expenditure and motor expenses – so it may be a good idea to work out which method is most appropriate depending on your circumstances (full details are given below).

The costs and expenses related to running a childminding business can include:

  • Portions of the fixed costs of your household (rent, council tax, insurance etc)
  • A portion of heating and lighting bills
  • A small portion of telephone and internet bills
  • Computer Equipment
  • Association Memberships
  • Insurance
  • Ofsted Registration Fees
  • Disclosure and Barring Service and Health Check Certificates
  • Training Costs (such as first aid)
  • Motor Costs (if needed as part of running the business)
  • Health & Safety Equipment (such as fire safety equipment, stair gates, plug covers)
  • Contracts/Record Books/Accident Books
  • Advertising and Marketing Expenditure
  • EYFS Support and Recording Materials
  • Cleaning Materials
  • Wear & Tear of Household Items
  • Toys & Play Equipment
  • Stationery & Craft Supplies
  • Food & Drink
  • Nappies & Wipes etc.

Under the special HMRC childminders’ expenses agreement, receipts are not required for small purchases under £10.

Receipts are also not required for food and drink expenditure – you are allowed to make a ‘reasonable estimate’ for these outgoings.

Additionally, you can use a flat rate for ‘wear & tear’ to cover the usage of general household furniture and items. This flat rate is 10% of your total income, however, it is important to note that items included in this flat rate cannot then be counted as an expense when they are replaced with new ones.

How to calculate household costs:

As mentioned above, you have two ways of calculating how much of your household costs you can apportion to your childminding business for tax purposes. You can use the rates agreed for childminders by HMRC or the ‘simplified expenses’ method for the self-employed. You will need to choose the most appropriate depending on your income and costs. The tables below show how to work them out.

The childminders agreement is based on how many hours you work, not how many children you look after, and can be calculated using the following table:

Hours Worked        % of Heating & Lighting       % of Rent, Council Tax and Water Rates  

  10                                         8%                                               2%  

  15                                         12%                                             4%  

  20                                         17%                                             5%  

  25                                         21%                                             6%  

  30                                         25%                                             7%  

  35                                         29%                                              9%  

  40                                         33%                                             10%  

   

This table and further information can be found here Business Income Manual

To use the ‘simplified expenses’ method that can also apply if you run a business from home, simply work out the total costs for the premises, then deduct a flat rate per month (depending on how many people live there) to work out personal use. The remainder can then be counted as business expenses:

   Number of People/   Flat Rate Per Month  

  1                                          £350  

  2                                          £500  

  3+                                        £650  

  If you use a car for the business you can also claim expenses and mileage to cover the costs associated with it within HMRC’s Simplified Expenses Model 

3. Useful resources to help you manage your business

To make sure your expenses, tax allowances, fee owed and profit are recorded accurately and to save you a lot of time and stress at the end of a tax year, you should use a basic document to record all of your expenses and income.

Our Childminder Accounts Book is a simple but effective resource to help you do this.

4. Working Out Your Taxable Profit

(Note – figures used are an example only and do not give an exhaustive list)

Your taxable profit is the total amount of your income from childminding services you will be required to pay tax on after you have deducted your costs and expenses. Your taxable profit is essentially your income/earnings as a childminder and is taxed at normal income tax rates. You will need to complete a self-assessment tax return each year find out more here

The basic calculation is:
All Income (including grants) – Costs & Expenses = Taxable Income

To give you a working example we’ll use the scenario of a childminder working from home for 40 hours per week, looking after 6 children – 4 are full-time and 2 are part-time for 10 hours per week after school (click here for more information on childminding ratios).

Her household includes an older child and her husband. Parents drop their children off and collect them, so there is no need for the use of a car. She has set her fees at £3.50 per hour for those who are with her full-time, and £4 per hour for part-time places.

Income:
Four children are with her for 40 hours per week, each at an hourly rate of £3.50, and 2 children are with her for 10 hours per week, each at a rate of £4 per hour.

4 x 40 x £3.50 = £560

2 x 10 x £4.00 = £80

£560 + £80 = £640 per week (or x 52 for £33,280 per year, then divide by 12 for an average per month of £2,773)

Ongoing Costs:

  • The rent on her house is £800 per month, council tax is £110 per month, the electricity and gas costs are £100 per month and water is £60 per month. (Remember – a portion of these expenses can be claimed as costs either using the percentage rates determined by the HMRC childminders agreement, or by the ‘simplified expenses’ method available to those who are self-employed)
  • The insurance costs associated with being a childminder are £50 per month
  • Membership of PACEY is £66 per year (or £5.50 per month)
  • Admin materials such as record books, accident books and EYFS materials cost £15 per month
  • The proportion of telephone and internet costs attributed to the business cost £7 per month
  • A small advert in the local paper costs £150, which was run for one month during the year
  • Cleaning materials cost £15 per month
  • Toys and craft supplies cost £50 per month
  • Food and drink costs £250 per month

This means that over one year, the costs associated with running a childminding business in this example are:

£130 per month for rent, council tax and utility bills under the childminders agreement with HMRC, or £420 per month/£5,040 per year if using the simplified expenses model (which illustrates why it is important to choose which method you use based on your circumstances). For this example, we’ll use the ‘simplified expenses method’.

The other costs added together are £392.50 per month (not including the advert), or £4,860 for the year including the advert.

The total costs and expenses for the year are therefore £9,900.

Your taxable income/earnings as a childminder are your total income minus your costs and expenses, so in this example, £23,380 – is your taxable income.

5. Working Out How Much Tax is Due

Childminders have to pay tax to HMRC based on their taxable income/earnings using standard income tax rates. Each year you will need to fill out a self-assessment tax return.

For the tax year 2018-2019, there is a personal allowance of £11,850 per year, which means you do not pay any income tax on the first £11,850 of earnings.

Income from £11,851 to £46,350 is taxed at a rate of 20%. (If you earn over £46,351 of taxable income there are higher rates of tax, see income thresholds from HMRC for more info).

Taking our example above, taxable earnings were £20,052. £11,850 of this counts as personal allowance and is not subject to income tax, leaving £8,202 to be taxed at 20%.

So of the £20,052 taxable earnings, £1,640.40 is due in tax.

This leaves total earnings for the childminder of £18,411.60 after tax over the year. However, you must also pay National Insurance Contributions (NICs)…

6. National Insurance Contributions (NICs)

Self-employed Childminders must pay two types of National Insurance Contributions (NICs)

Class 2 NICs
For the tax year 2018-2019 Class 2 NICs are payable if your profits are £6,205 per year or more, normally worked out on previous earnings through self-assessment. If you are unsure about what to pay when starting up you should contact HMRC.

Currently, these are a flat rate of £2.95 per week

Class 4 NICs
In addition, if your earnings (taxable profits) are more than £8,424 in the year, class 4 NICs are also due, at a rate of 9% of the profit/earnings between £8,424 and £46,350 and 2% on profits over £46,350.

For our childminder example above, this means both class 2 and class 4 NICs would be due for the year.

Class 2 NICs would be £153,40 for the year.

Class 4 NICs would be 9% of the difference between £8424 and the total profit/earnings of £20,052… So 9% of £11,628 or £1046.52.

Total National Insurance Contributions would, therefore, be £1,199.92, leaving overall earnings for the childminder in the example of £17,211.68 for the year.

 

If you are still struggling to understand what is required of you in terms of tax and NI from HMRC as a sole trading childminder then HMRC has some useful videos online to help you.

Advice for childminders

 

Other Useful HMRC links on being Self-Employed and Tax for Childminders

Self-Employed National Insurance Rates 2018/19

Income Rates and Allowances 2018/19

Simplified Expenses for Working from Home

Simplified Expenses when You Live in your Business Premises

HMRC Business Income Manual

How to Set Up as a Sole Trader

How to Register as a Childminder

HMRC Online Free Course – Advice for Childminders

Support for childminders from HMRC

Legal FAQs for new childminders

We are unable to answer questions on HMRC Tax Guidance. Any concerns or queries you may have should be directed to the relevant organisation. You can find some useful HMRC links at the bottom of this article and if you are looking for a resource that will help you manage and track your accounts, please see our Childminding Accounts Record Book

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