If you are employed, you could save tax and national insurance by receiving a portion of your salary in the form of childcare vouchers. These may be used in payment of fees with an approved childcare provider (an Ofsted registered nursery school, out of school club, child-minder, etc.).
The scheme takes advantage of a tax exemption for this specific "benefit-in-kind". Each tax week, the first £50 (or £217 per month) you receive in childcare vouchers is exempt from Tax and NIC. Each member of a couple can take advantage (provided you are both employed).
Both employee and employer NIC is saved which provides a degree of incentive for employers to opt in.
There are a number of ways that the system can be run.
- Your employer can contract with an approved child-carer or even set up a nursery at your workplace. The employer pays for the place directly which means there is no action required by you.
- Your employer provides childcare vouchers as a benefit on top of your regular salary.
- You opt to sacrifice some of your salary in exchange for childcare vouchers.
Of these, the latter is probably the most commonly used.
Salary sacrifice considerations
While a salary sacrifice may seem an attractive concept there are implications. Some of these are below:
- From the perspective of HMRC (formerly Inland Revenue) your earnings and your NIC contributions reduce. This can have an effect on your entitlement to maternity pay, sick pay, state pension , etc.
- Your earnings reduce but so too do your childcare costs. This can have a negative effect on your Tax Credit entitlement.
- Engaging in a salary sacrifice requires your employment contract to be altered. There is no automatic right to return to your original salary within the period of the revised contract (normally 12 months or so). So, for example, if a family member suddenly becomes available to provide childcare you may be unable to alter the contract before the review date.
For many people it is unlikely that salary sacrifice will present a major problem: it would, however, be sensible to check. If you are involved with a salary sacrifice scheme there seems nothing to be gained from sacrificing more than the weekly tax exempt amount of £50.
Are childcare vouchers worthwhile?
That's a tricky question: the answer is "it depends".
If the vouchers are offered in addition to your regular salary there is no doubt that using them is well worthwhile.
If you pay higher rate tax and/or have high childcare fees, again, the answer is likely to be yes. [By "high childcare fees" we mean above the working tax credit weekly limits: £175 for one child or £300 for two or more children].
If you are claiming tax credits and they are yielding a reasonable income, the answer is probably no. [Reasonable income? More than £545 per year - or £1090 per year if you have a baby aged under one].
If you are giving serious consideration to entering a salary sacrifice scheme your HR department should be able to provide more detailed (and specific) advice.
There is additional reading at the following sources: