Working parents in the United Kingdom are leveraging a lesser-known government scheme to reduce annual childcare expenses by thousands of pounds. The 'workplace nursery benefit scheme' allows employees to pay for nursery fees from their salary before income tax and National Insurance contributions are calculated, effectively lowering their taxable income.
For Emily Summerson, 32, and her husband Reginald Port, 35, this benefit has resulted in annual savings of £22,966 on nursery fees for their three young children. Both Summerson, a chief executive, and Port, a managing director, work full-time. Their two older children attend nursery four days a week, while their youngest attends three days, with family members assisting on other days. Without this scheme, their monthly nursery bills amounted to £3,600, totaling £43,200 per year.
Summerson, who is an additional rate taxpayer, set up a nursery salary sacrifice scheme through a third-party firm, Kinsail, at her company. This arrangement reduced their monthly expenses by 47% to £1,913, as she no longer pays 45% tax and National Insurance on that portion of her income. "It’s a no-brainer for us," Summerson stated. "It’s made a huge difference because the money it saves can be used towards holidays or things to do with the family. We definitely feel the financial benefit every month."
The salary sacrifice mechanism involves an employee accepting a lower gross salary in exchange for a non-cash benefit, such as the employer directly paying nursery fees. Many employers utilize specialized third-party companies to establish these schemes and coordinate with nurseries.
To qualify for the benefit, the child must attend an Ofsted-registered nursery that participates in the program. HM Revenue and Customs (HMRC) also mandates that employers actively contribute to the financing and management of the nursery to ensure tax compliance. This typically involves employers contributing an additional minimum of £100 per month towards fixed nursery costs, which must be used for equipment or resources like staff training or facilities.
Sarah Coles, head of personal finance at AJ Bell, explained that these schemes utilize legislation preventing the fees from being taxed as income when nurseries partner with employers to provide care for staff. "You need to be confident the scheme is set up correctly, and that the employer really is involved in the running of the nursery in some way," Coles advised.
HMRC has previously issued warnings and initiated inquiries into companies using third-party firms to facilitate these arrangements. The scheme, introduced in 1990, was originally intended to encourage employers to operate nurseries or jointly finance them to provide places for staff children.
Meeting the tax requirements may involve parents interacting with nursery managers to discuss fund allocation or attending meetings related to nursery committees. Summerson found the setup process straightforward, having previously used a similar scheme with a prior employer before implementing it at Vuba through Kinsail.
There is no upper limit on the amount that can be saved through salary sacrifice schemes. Individual savings depend on the nursery bill size and the parent's income level, with higher earners potentially benefiting the most. For example, a basic rate taxpayer spending £1,000 monthly on nursery fees could save £3,360 annually, while a higher-rate taxpayer with the same costs could save £5,040 per year.
This scheme can be particularly beneficial for parents struggling with high childcare costs. The average annual cost for a full-time nursery place for a child under two in the UK is £7,738, with costs in London and the South East exceeding £20,000 even with government funding. While the government offers up to 30 hours of free childcare for children aged nine months to four years and a tax-free childcare scheme providing up to £2,000 annually, these benefits are lost if one parent earns over £100,000. Summerson, who exceeds this threshold, noted the limited benefit of government-advertised support for families like hers before discovering the salary sacrifice option.
Parents considering the scheme should evaluate potential impacts on their finances. A lower gross salary could affect mortgage affordability and reduce pension contributions, depending on the employer's policy. It is advisable to confirm how pension contributions, statutory maternity pay, statutory redundancy pay, and life insurance are calculated based on salary before and after the sacrifice.
