Accountants for Nurseries and Daycare Settings

You run a privately owned, fee-charging nursery or daycare setting, most likely through a limited company, with a payroll, a lease and an occupancy figure you watch every week. Your accounting year is decided by three things: what counts as taxable income, what your staff genuinely cost once National Insurance and pension are loaded on, and how much of the VAT you pay you will never see again. Start with the money coming in, because that is where most settings get their first surprise.

Where your income comes from, and what HMRC does with it

A typical setting has three streams. Parent-paid fees arrive directly. Funded-hours payments for the 15 and 30 hours of funded childcare arrive from your local authority, usually termly and in arrears, at a rate the authority sets. And some parent fees reach you through Tax-Free Childcare (TFC), where the parent pays into a government account, the government tops it up, and the balance is paid across to you.

All three are ordinary taxable trading income of your business. The funded-hours money is not a grant, not a subsidy in the tax sense, and not outside the scope of corporation tax. Government-routed payment does not change the character of the receipt: it is consideration for childcare you supplied, so it sits in turnover next to the fee a parent paid you in cash. The same is true of a TFC receipt. If your bookkeeping treats local authority income as something separate that sits outside the profit and loss account, your taxable profit is wrong.

Two practical points follow. First, funded hours are recognised in the accounting period in which you deliver the childcare, not the period in which the authority pays you, so a termly payment that lands after your year end still belongs to the year you earned it. Second, because funded rates are set by the authority rather than by you, they behave like a fixed price on a variable cost base. When your staffing costs move, that part of your income does not move with them.

We describe how funded entitlements are paid and taxed. We do not advise on which families qualify, on your registration status, or on ratios and inspection. Those sit with your local authority and your regulator.

Exempt is not zero rated, and that distinction costs money

Childcare supplied by a state-regulated provider is exempt from VAT as a welfare service directly connected with the care or protection of children, under VATA 1994 Schedule 9 Group 7 item 9. State-regulated means Ofsted-registered in England, or registered with the equivalent regulator in Wales, Scotland or Northern Ireland.

Most nursery owners know they do not charge VAT on fees. Fewer have been told the consequence. Exempt supplies and zero-rated supplies both mean no VAT on your invoice, but they behave in opposite ways on the purchase side. A zero-rated business charges 0% and still recovers the VAT it is charged on its own costs. An exempt business charges nothing and recovers nothing. Every pound of VAT charged to you on a supply relating to your exempt childcare activity is a cost you absorb.

Put a number on it. You refurbish a room and re-fit a kitchen for £60,000 before VAT. At the 20% standard rate that has applied since 4 January 2011, the builder charges £12,000 of VAT. A standard-rated trading business would recover that £12,000 in full on its next return. You do not. Your project costs £72,000, and it is £72,000 you must recover out of fee income and funded rates over the life of the asset. The same applies to a minibus, to soft-play equipment, to your cleaning contract and to your accountancy fee.

Plan around it in two places. Budget capital projects at the VAT-inclusive figure from the outset, because a quote presented "plus VAT" understates your real cost by a fifth. And when you claim capital allowances, the qualifying expenditure is the VAT-inclusive amount, since the irrecoverable VAT is part of what the asset cost you.

If your setting also makes taxable supplies alongside exempt childcare, for example selling branded uniform or nappies to parents, hiring out a room in the evenings, or running a café open to the public, you are into partial exemption. That is a set of rules for splitting input VAT between your exempt and taxable activities, and it can bring a registration requirement once taxable turnover passes the £90,000 registration threshold that has applied since 1 April 2024. We are not going to attempt that calculation on a public page, because the method depends on your specific mix and on which special method HMRC has agreed with you. If you have any taxable income stream at all, get the split reviewed before you file.

The loaded cost of a room leader, in full

Staff cost is the dominant line in almost every setting, and salary is not the number that leaves your bank. Two statutory on-costs sit on top of it.

Employer secondary Class 1 National Insurance runs at 15% of earnings above a secondary threshold of £5,000 a year, from 6 April 2025. Pension auto-enrolment requires you to enrol eligible staff, meaning those aged 22 to State Pension age earning above the £10,000 earnings trigger, and to contribute at least 3% of qualifying earnings, which is the band from £6,240 to £50,270. The total minimum contribution is 8%, with the employee funding the balance of 5% including tax relief. Those auto-enrolment figures are the 2025/26 set and were still current when this page was checked in August 2026.

Gethin runs a 42-place setting in Preston through his own limited company and is recruiting a room leader on £26,000 a year. Work it as three lines on the same salary. The £26,000 is what the room leader sees. Employer National Insurance is 15% of the £21,000 above the £5,000 secondary threshold, which is £3,150.00. Employer pension is 3% of the £19,760 above the £6,240 lower limit of qualifying earnings, which is £592.80. The post costs the company £29,742.80 before the Employment Allowance.

Price the rota off that figure rather than the salaries. The gap is £3,742.80 a post, and it grows once you add payroll software, the holiday and sickness cover your ratios oblige you to provide, statutory maternity exposure in a largely female workforce, and the employers' liability insurance you are required to carry.

One relief pulls the National Insurance figure back. The Employment Allowance is £10,500 and offsets employer National Insurance for a business with genuine non-director employees, which every staffed setting has. It is claimed against your employer National Insurance bill across the whole payroll, not per employee, so on a small setting it can wipe out several months of the charge before it runs out. Claim it through your payroll software each tax year.

Getting Real Time Information submissions in on or before each payday matters here too. Late filing penalties start at £100 a month for an employer with one to nine employees and £200 for ten to 49, which is the range most settings sit in. If payroll is the part of the month you dread, our page on payroll services for small businesses covers what an outsourced service actually does.

Occupancy, funded rates and where the margin actually is

Your revenue is a function of two things you control unevenly: how many of your places are filled, and what each filled place earns. Fee-paying places earn what you charge. Funded places earn what your authority pays. Your costs, by contrast, are close to fixed once the rota is set, because ratios mean you cannot flex staffing hour by hour with attendance.

That is why the useful management figure for a nursery is not turnover but contribution per occupied place per week, measured separately for fee-paying and funded places. Take a room's weekly staffing cost, using the loaded figures above rather than salaries, add its share of rent, utilities and irrecoverable VAT, and divide by the places you actually fill. Run it for the funded rate and for your private rate side by side. If the funded rate does not cover the loaded cost of the ratio it requires, you now know exactly how much private fee income has to carry it, and you can decide your funded-to-private mix on evidence rather than instinct.

Monthly management accounts are what make this visible in time to act. Year-end accounts filed nine months after your period end tell you about a problem you can no longer fix.

Corporation tax and getting money out of the company

Your company pays corporation tax on its taxable profit after those staff costs, rent and capital allowances. The small profits rate is 19% where augmented profits do not exceed £50,000, the main rate is 25% where they exceed £250,000, and marginal relief tapers between the two, producing an effective rate of 26.5% on the slice of profit that falls in the band. Those rates and limits apply for financial years 2025 and 2026. Corporation tax is due nine months and one day after your accounting period ends, and the CT600 return is due twelve months after it.

Watch the associated-company rule if you operate more than one setting through separate companies. The £50,000 and £250,000 limits are divided by the number of associated companies, so two companies each face limits of £25,000 and £125,000, and profits hit the marginal band far sooner than an owner expects. It is one of the most common and most expensive surprises for owner-managers who grew by opening a second site in a new company.

On the way out, the usual owner-manager question of salary versus dividends applies to you as it does to any company director, with the added wrinkle that a director's salary in a company with other staff can be set differently from a single-director company because the Employment Allowance is available to you. Our page on corporation tax and dividend tax for company directors sets out the interaction.

Which settings this covers, and which it does not

This page addresses privately run, fee-charging providers: a nursery, daycare setting or out-of-school club operated as a limited company or as a business by its owners. It does not cover charity or committee-run preschools and playgroups, academy trusts, or any setting whose accounts require an audit or a regularity assurance engagement. Those bring a different reporting framework and a different set of obligations, and they are outside what we advise on here. If your setting is a registered charity or sits inside a trust, the guidance on this page is not the right starting point for you.

If you are a self-employed childminder working from your own home rather than running a setting with premises and staff, the tax picture is genuinely different and the simplifications available to you are different too. Our page on accountants for childminders is the one you want.

What to ask an accountant to actually do

The work that pays for itself in this sector is specific. Reconcile local authority funding statements to the childcare you delivered, because termly statements and headcount adjustments do not always agree with your register and underpayments are common. Run the payroll accurately against a rota that changes weekly, with the auto-enrolment assessment done each pay period rather than once a year. Produce monthly management accounts with occupancy in them, not just a profit figure. Check whether you have taxable supplies sitting alongside your exempt childcare and, if you do, get the partial exemption position right before HMRC asks. And make sure capital spend is claimed properly, at VAT-inclusive cost, through the Annual Investment Allowance where it qualifies.

If you would like a second opinion on any of those, tell us your setting's size, your funded-to-private mix and whether you have any income outside childcare fees, and we will tell you where the exposure is.