Employer-supported childcare: the benefits

How childcare vouchers can save you money

Childcare vouchers are usually an employer-provided non-cash benefit. However, when taken via salary sacrifice they may be treated effectively like cash pay for the purposes of working out entitlement to them when claiming statutory maternity pay.

Normally benefits provided by your employer are taxable and subject to National Insurance contributions (NIC). However, to help parents with childcare costs, the Government allows employers to give eligible employees childcare vouchers on a tax- and national insurance-free basis (up to certain limits).

Most employers do not give these vouchers on top of salary, but in conjunction with a salary sacrifice arrangement. This means you give up some of your salary in exchange for the vouchers. Salary sacrifice schemes save employees money, because no tax and national insurance is payable on the amount of salary that is sacrificed for the vouchers. For a basic rate taxpayer this saves 20p tax and 8p National Insurance on every £1 of vouchers.

Amount of savings

How much tax and National Insurance you can save depends on when you joined your employer’s childcare voucher scheme. Note that no relief is available for new joiners to such schemes from 4 October 2018, as explained on our childcare vouchers page.

If you are a basic rate tax payer you can claim up to £55 a week in vouchers that are tax free and national insurance exempt.

If you are a higher or additional rate tax payer and you joined your employer’s scheme before 6 April 2011, you can claim up to £55 a week in vouchers that are tax free and national insurance exempt.

However, if you joined your employer’s scheme on or after 6 April 2011 and you are:

• A higher rate taxpayer, you can claim up to £28 a week in vouchers that are tax free and national insurance exempt.
• An additional rate taxpayer, you can claim up to £25 a week in vouchers that are tax free and national insurance exempt.

  Following the introduction of Scottish income tax and Welsh income tax, the Scottish and Welsh governments set their own income tax rates and thresholds for non-savings, non-dividend income. However, eligibility criteria for employer provided childcare vouchers are not devolved to the Scottish and Welsh governments and, therefore, the basic, higher and additional income tax rates mentioned above are the UK rates. This means that the same limits apply for all employees in the UK in receipt of childcare vouchers even if they are Scottish or Welsh taxpayers. The actual tax savings for Scottish taxpayers may differ from those set out in the table above, as they will pay income tax according to the Scottish rates and bands. For 2024/25, there will be no difference in the tax paid by Welsh taxpayers.

If you take vouchers above these limits, the excess will be liable to tax and National Insurance.

Understanding if you’re a basic, higher or additional rate taxpayer

At the start of each tax year, which runs from 6 April to 5 April, your employer will carry out a basic earnings assessment. This will identify you as a ‘basic rate’, ‘higher rate’ or ‘additional rate’ taxpayer for this purpose. The assessment remains valid for the whole of the relevant tax year and is an assessment made based on information available at the start of the tax year. The value of your childcare vouchers will be based on this assessment. More detailed information about the basic earnings assessment is available in the HMRC guide for employers.