For working parents across the UK, finding affordable and reliable childcare is one of the most important and often most challenging aspects of family life. Over the past few years, childcare policies in the UK have evolved significantly, with new funding opportunities, government schemes, and flexible care options available to help parents balance work and home responsibilities.
Having the ability to salary sacrifice for childcare is an added bonus. When planning childcare, be cautious and familiarise yourself with the rules.
In this blog, we’ll explore the main childcare provisions in the UK, who qualifies for them, and how families can make the most of available support.
Early Years Education: The Foundation of UK Childcare
Children in the UK are entitled to a certain amount of free early education and childcare before they start school. This provision supports children’s development and helps parents return to work or training.
All 3 and 4-year-olds are entitled to 15 hours of free childcare each week (38 weeks per year). Working parents may qualify for an additional 15 hours, bringing the total to 30 free hours per week. This support can start as early as 9 months. Rules vary in other nations of the UK, so do check.
Childcare Vouchers and Tax-Free Childcare
Childcare Vouchers closed to new applicants in October 2018, but many parents still use them through employers who joined before 2018.
The current system available to new families is Tax Free Childcare
Under the Tax-Free Childcare scheme:
- Parents can open an online childcare account if they are working at least 16 hours each.
- For every £8 parents contribute, the government adds £2, up to £2,000 per child per year (or £4,000 for disabled children).
- The funds can pay for childminders, nurseries, nannies, and after-school clubs registered with Ofsted (or the relevant authority in devolved nations).
Salary Sacrifice
As mentioned earlier, the option to sacrifice part of your salary for childcare ended in 2018. Salary sacrifice offers tax benefits for both the employer and employee, and was very popular.
Employees reduce their gross salary to pay for childcare. As the fees are taken before the payroll taxes are calculated, there are significant tax savings.
Although it is not a direct replacement, salary sacrifice can still be utilised for workplace nursery schemes.
Workplace Nursery and Salary Sacrifice
The workplace nursery exemption allows employers to establish nurseries on their premises. Additionally, there is an extension to this exemption that applies when the ‘partnership requirements’ are met. This extension enables multiple employers to collaborate in financing and managing a childcare facility, either wholly or partially.
When selecting a nursery for your child while hoping to take advantage of tax breaks, it’s important to be cautious. Keep in mind that HM Revenue & Customs (HMRC) will never allow businesses, like your local nursery, to advertise that their programs are tax-compliant. As a parent, you should be aware of this.
A workplace nursery is normally either on or near your place of work. What’s more, your employer bears the majority of the financial burden. This means taking on the financial risks of running a childcare nursery.
If the financial risks rest with the employer, then they will also be involved in the management of the nursery.
HMRC allows businesses to form partnerships in order to take advantage of this scheme. The main goal is to ensure that smaller businesses, which may not have enough staff or the capacity to bear the full financial burden, are not discriminated against. However, it is essential that the partnership is a genuine one.
How does the partnership work?
For the partnership to work effectively, the Employer must be involved more. A nominal contribution of, say, £100 per month towards an employee’s child in a commercial nursery simply won’t work.
For the scheme to be tax-compliant, the following must happen:
- The employer must be involved in the management of the nursery and enter into a true partnership with a commercial nursery.
- This involves daily business decisions such as finance and allocation of resources, among other things.
- Accept responsibility for the financing of the nursery, either wholly or partly or therefore taking financial risks.
- An employee simply having a seat on the board or committee does not qualify as getting involved in the management of the business
You can read the full guidance here
Next Steps
If you are currently providing childcare through a salary sacrifice arrangement for certain employees, you need to ensure that they qualify under either of the following conditions:
- The arrangement was established before October 2018.
- Or you meet the criteria for the Workplace Nursery Scheme.
To qualify for the Workplace Nursery Scheme, you must either have your own childcare facilities or have a significant partnership with a commercial third-party provider.
HMRC has increased its inquiries into workplace nursery schemes run by commercially marketed providers, as these schemes often do not comply with the regulations. To be successful, it is essential to meet the partnership requirements.
We therefore recommend that if you have entered into an agreement with a commercial nursery, you understand whether it provides the tax breaks. As an employer, it is ultimately your responsibility.
If you have any questions on this topic, please email us at enquiries@myersclark.co.uk