Childcare Salary Sacrifice

What is a childcare salary sacrifice scheme?

Childcare salary sacrifice is a tax-efficient scheme that allows employees to contribute towards childcare costs by exchanging part of their gross salary. This reduces their taxable income, offering savings on both tax and National Insurance contributions.

The government’s Childcare Voucher Scheme, which previously allowed parents to save on childcare costs through salary sacrifice, closed to new applicants in October 2018. However, childcare salary sacrifice still exists in the form of the Workplace Nursery Scheme. This scheme enables employees to benefit from tax savings while accessing high-quality childcare directly through their employer, making it a valuable alternative for both businesses and working parents.

How does salary sacrifice childcare work?

A salary sacrifice childcare scheme allows employees to reduce their taxable income by exchanging a portion of their gross salary for childcare costs. This arrangement provides tax and National Insurance savings, making childcare more affordable while benefiting both employees and employers.

Although the government’s Childcare Voucher Scheme is closed to new applicants, childcare salary sacrifice is still available through the Workplace Nursery Scheme. Under this scheme, employers partner with registered nurseries to provide childcare, and employees contribute towards the costs through salary sacrifice childcare deductions. This not only helps parents save on childcare expenses but also enables businesses to reduce their National Insurance liabilities, making it a cost-effective solution for all parties involved.

Benefits of childcare salary sacrifice

For Employers:

• National Insurance Savings – Employers save on National Insurance contributions for each participating employee.
  
  
• Enhanced Employee Benefits – Strengthens the benefits package, helping to attract and retain staff.
  
  
• Improved Employee Productivity – Supports working parents, reducing stress and absenteeism.
  
  
• Cost-Effective Support – Offers a tax-efficient way to assist employees without increasing salaries.
  
  
• Corporate Social Responsibility – Demonstrates commitment to employee wellbeing and work-life balance.

For Employees:

• Tax and National Insurance Savings – Reduces taxable income, making childcare more affordable.
  
  
• Lower Childcare Costs – Enables employees to save money while accessing high-quality childcare.
  
  
• Simplified Payments – Contributions are deducted directly from salary, easing financial management.
  
  
• Increased Workplace Support – Encourages work-life balance by making childcare more accessible.
  
  
• Long-Term Financial Benefits – Savings can accumulate over time, reducing overall childcare expenses.
  
  
  
  

Who can participate in the scheme?

As an employer, you can offer a childcare salary sacrifice scheme to your employees, but both employer and employee must meet specific eligibility requirements for the scheme to be implemented successfully.

1. Employer Requirements:

   • You must be a UK-based employer with the capacity to operate a salary sacrifice arrangement.
     
     
   • The scheme should be part of a wider benefits package, and you will need to work with a third-party provider to manage the process (usually an external childcare voucher or salary sacrifice provider).
     
     
   • You must ensure that the childcare provider(s) meet the regulatory standards required by HMRC.
     
     
   • Your payroll system must be able to adjust for salary sacrifice and report correctly to HMRC.
     
     
     
     

2. Employee Eligibility Criteria:

   • Employees must have a contract of employment and be under PAYE (Pay As You Earn) taxation.
     
     
   • Employees must earn at least the National Minimum Wage (NMW) or National Living Wage (NLW) after any salary sacrifice deductions are made.
     
     
   • Employees cannot participate in salary sacrifice schemes if it reduces their gross income below the minimum wage levels.
     
     
   • They must opt-in to the scheme voluntarily, and it is typically offered to full-time and part-time employees.
     
     

Difference Between Childcare Salary Sacrifice and Tax-Free Childcare

Childcare Salary Sacrifice and Tax-Free Childcare are two separate government schemes designed to help employees with the cost of childcare, but they operate differently.

1. Childcare Salary Sacrifice:

   • How it works: Employees agree to sacrifice part of their pre-tax salary in exchange for childcare vouchers or direct payments to a childcare provider.
     
     
   • Benefits: Both employees and employers save money on income tax and National Insurance contributions, leading to potential savings for both parties.
     
     
   • Limitations: Salary sacrifice reduces the employee’s gross income, which could affect pension contributions, mortgage eligibility, or other income-dependent benefits.
     
     
   • Suitability: Best suited for employees who are already paying for childcare regularly, as the scheme offers regular contributions via salary sacrifice.
     
     
     

2. Tax-Free Childcare:

   • How it works: The government contributes 20% towards childcare costs (up to a £2,000 annual maximum per child) if the employee meets the eligibility criteria. Employees pay the provider directly through an online account, and the government matches their contribution.
     
     
   • Benefits: It’s a simple scheme to set up, and employees do not sacrifice their salary. The government contribution makes it attractive for many families.
     
     
   • Limitations: Employees must meet certain income limits to qualify, and they can only use this scheme with approved childcare providers.
     
     
   • Suitability: Best for employees who do not want to reduce their salary or who prefer the government contribution on top of their regular childcare payments.

How to Set Up a Salary Sacrifice Childcare Scheme

Step-by-step guide for employers:

1. Evaluate employee demand:

   • Conduct a survey or have informal discussions to understand if employees are interested in participating in the scheme.

1. Choose a childcare voucher provider:

   • Partner with a recognised third-party provider who can manage the salary sacrifice process, ensuring compliance with HMRC regulations.
   • Verify that the provider offers access to a range of childcare providers (nurseries, after-school clubs, etc.).
     
     

2. Update contracts and policies:

   • Ensure the employee's contracts are updated to reflect the terms of the salary sacrifice arrangement.
   • It’s crucial to outline the impact of salary sacrifice on benefits and pension contributions, which should be documented in a formal agreement.
     
     

3. Inform and enrol employees:

   • Provide employees with clear, easy-to-understand communications about the scheme, its benefits, and how they can participate.
   • Employees must voluntarily opt into the scheme and make informed decisions.
     
     

4. Adjust payroll systems:

   • Work with your payroll team or provider to ensure that the salary sacrifice deductions are correctly processed.
   • Ensure that National Insurance and tax reductions are applied accurately.
     
     

5. Compliance and reporting:

   • Make sure you comply with HMRC rules for reporting the deductions and ensuring that employees still meet the minimum wage thresholds.
   • Review and report annually to HMRC to ensure compliance.

Financial Impact of Salary Sacrifice Childcare

Savings for Employers and Employees:

1. Employee Savings:

   • Employees save on income tax and National Insurance contributions. For example, if an employee sacrifices £2,000 per year, they may save up to 32% in tax and NI (depending on their tax bracket).

1. • If the employee is a higher rate taxpayer, the savings could be even greater, with combined tax and NI savings potentially reaching £800+ annually on a £2,000 sacrifice.
     
     
     

2. Employer Savings:

   • Employers also benefit from savings on National Insurance contributions (NICs) by making salary reductions for employees. For example, if an employee sacrifices £2,000, the employer could save around £230 in NICs.
     
     
   • This reduces overall payroll costs, providing a win-win situation for both employer and employee.
     
     
     

3. Example Calculation:

   • If an employee earns £30,000 and sacrifices £2,000 for childcare, their taxable income drops to £28,000. The employee’s tax savings could amount to approximately £400, and National Insurance savings could be around £250. The employer also benefits from NIC savings of around £230.

Legal and Compliance Considerations

When implementing a childcare salary sacrifice scheme, there are several legal and compliance aspects to consider:

1. HMRC Regulations:

   • You must ensure that the scheme complies with HMRC guidelines for salary sacrifice arrangements. This includes ensuring that employees’ salaries do not fall below the minimum wage threshold after deductions.
   • You must report the details of the scheme, including the amount of salary sacrifice, to HMRC through PAYE.
     
     

2. Contractual Changes:

   • Any changes to salary as part of the salary sacrifice scheme must be documented in the employee’s contract.
   • The reduction in salary will impact gross pay, which in turn could affect certain benefits (e.g., pension contributions, sick pay, or maternity pay), so these should be addressed in the employment contract.
     
     

3. Pension Contributions:

   • If employees are contributing to a pension scheme, the salary sacrifice could reduce the employer and employee contributions. Employers should review their pension arrangements and ensure both parties are aware of any impact.
     
     

4. Reporting and Auditing:

   • Keep records of the salary sacrifice arrangements and regularly audit them for compliance.
   • Employers must ensure that the National Insurance contributions and tax are calculated correctly each pay period.

Common Misconceptions About Childcare Salary Sacrifice

There are several common myths regarding childcare salary sacrifice schemes, which employers should be aware of to avoid confusion.

1. Myth: Employees will lose out on tax-free childcare benefits:

   • Reality: Employees can choose between either the childcare salary sacrifice scheme or the Tax-Free Childcare scheme. They cannot participate in both at the same time, but the salary sacrifice scheme can still be beneficial for employees paying for regular childcare.
     
     

2. Myth: The salary sacrifice scheme always reduces employees’ take-home pay significantly:

   • Reality: Although salary is sacrificed, employees still receive the same amount of childcare benefits. The savings from tax and National Insurance often outweigh the sacrifice.
     
     

3. Myth: Employers are responsible for managing all aspects of the scheme:

   • Reality: Employers typically partner with third-party providers to manage the administration of the scheme, from setting up accounts to reporting to HMRC. The burden on employers is minimal.
     
     

4. Myth: Employees must sacrifice large amounts of their salary to make the scheme worthwhile:

   • Reality: The scheme can be set up with flexible amounts, depending on the employee’s needs, and even small sacrifices can lead to substantial savings.
     
     

Professional salary sacrifice implementation

At Pulse Accountants, we provide a comprehensive service to help businesses implement and manage salary sacrifice schemes efficiently and compliantly.

What We Offer:

• Expert Consultation – We assess your business needs and help design a salary sacrifice scheme tailored to your workforce.
  
  
• Scheme Implementation – We manage the setup process, ensuring compliance with HMRC regulations.
  
  
• Employee Communication – We provide clear, professional communication to employees, ensuring they understand how salary sacrifice works and the benefits it offers.
  
  
• Ongoing Support – Our team is available to answer queries and provide ongoing administrative support.
  
  

Pricing

• Cost: Varies on a case-by-case basis. Based on company size and employees. Contact us to get a quote.
  
  
• Transparent Communication: We communicate the scheme benefits directly to employees and provide full support for any questions.
  
  
• Flexible Payment Options: Our fee is spread over several months, so your business benefits from cost savings immediately.

Why choose Pulse?

With extensive experience in salary sacrifice childcare schemes, we provide businesses with a seamless and fully compliant salary sacrifice solution. Our team ensures that both employers and employees understand the benefits and make the most of their opportunities.

Key Reasons to Work With Us:

✔ Industry Expertise – We have a deep understanding of salary sacrifice regulations.

✔ Tailored Solutions – We design bespoke schemes that align with your business and workforce needs.

✔ Compliance Assurance – We ensure full adherence to HMRC guidelines and workplace rules.

✔ Dedicated Support – Our team is available to provide ongoing assistance and ensure smooth implementation.