With more and more parents working full time, child care costs can be a serious consideration

Done correctly, there can also be some great tax breaks to subsidise these costs, even for small employers

What's the tax break?

By using a salary sacrifice arrangement, employees can save tax on some of their childcare costs.  Effectively, they have the childcare costs deducted from their salary before tax is calculated

For example, currently, a basic rate taxpayer might be earning £1,000 a month before tax.  He/ She now pays £1,000 x 20% in tax = £200

If they were to sacrifice £100 a month, in exchange for £100 of childcare vouchers, it'd look like this...

£1,000 - £100 = £900 a month taxable at 20% = £180 in tax. 

They've saved £20 in tax by buying childcare vouchers from their employer

How much can employees have?

Employees are limited on how much they can have in Childcare vouchers via salary sacrifice.  The limit depends on whether they are a basic rate or higher rate taxpayer (currently, if you earn over £50,000 you are a higher rate taxpayer)

Basic rate taxpayers can have £243 a month

Higher rate taxpayers can have £124 a month

Can Directors of Limited Companies do this?

Yes!  With a few small tweaks, Directors can definitely benefit.  Directors need to speak with their Accountant first so that they can receive advice that is specific to their circumstances

How do I set this up?

We don't recommend one particular provider of vouchers.  Have a search on Google or ask your childcare provider if they recommend any.  Alternatively, we can share a few names of providers our clients use

One final point....

It may seem obvious, but this scheme is for employees and Directors who are using registered childcare.  We have been asked in the past if it can be used to pay relatives for childcare.  The answer is no, it can't, unless your relative can accept vouchers and is a registered childcare provider


stuart ramsay

Written by stuart ramsay