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Introduction to childcare benefits
Sorting out childcare can be a massive headache for parents, as well as a major cost. Two initiatives to lower this cost are childcare salary sacrifice and tax free childcare.
Childcare salary sacrifice is an arrangement an employee makes with their employer to sacrifice, or give up, part of their salary in return for a childcare benefit.
Tax free childcare is a government scheme that helps employees save money on childcare by topping up their contributions to a designated childcare payment account.
For parents, both schemes can provide great value and support in meeting the costs of childcare. For employers, it’s important to know how employees can lower their financial stress in this tricky area. But what are the main differences between childcare salary sacrifice and tax free childcare? And which might be most suitable for your employees?
Understanding childcare salary sacrifice
Like any salary sacrifice scheme, childcare salary sacrifice involves giving up a portion of pre-tax salary in exchange for a benefit, in this case either childcare vouchers (if the employee joined the scheme before 2018), or a payment to a workplace nursery.
The opportunity to salary sacrifice for childcare vouchers was only available up until 4th October 2018. Another version of childcare salary sacrifice that closed on 4th October 2018 was directly contracted childcare, where the employer arranged childcare on behalf of the employee. If someone joined these schemes on or before that date, and remains with the same employer, they may still be eligible to take part. An employee can sacrifice up to £55 a week as a basic rate taxpayer, or £28 as a higher rate taxpayer.
If your company missed out on setting up these schemes, or you have employees who joined after 2018, they can take advantage of the workplace nursery salary sacrifice scheme. The workplace nursery salary sacrifice scheme sees your company make an arrangement to provide childcare for employees’ children in a designated workplace nursery. This might sound complicated, but working with a financial wellbeing provider can help you set this up quickly and easily.
How childcare salary sacrifice works
The current childcare salary sacrifice scheme, aka the workplace nursery salary sacrifice scheme, works in the following way:
- The employer signs up with a scheme provider
- The employee chooses a registered childcare provider (either part of the scheme, or willing to sign up)
- The employee agrees to the salary sacrifice
- The employer pays the workplace nursery from the sacrificed salary
- The employee saves on their National Insurance and Income Tax costs, offsetting the nursery fees
- The employer makes National Insurance savings which are used to provide extra nursery funding as part of HMRC’s stipulations for the scheme
- Employees should have a say in how the nursery is run, again an HMRC stipulation, which your scheme provider will facilitate
Advantages of childcare salary sacrifice
Childcare salary sacrifice through the workplace nursery scheme has some key benefits:
- Lowering employee NI and Income Tax costs: sacrificing pre-tax salary means employees will pay less National Insurance and Income Tax. This can then offset some of the cost of childcare, in effect giving a discount. The average saving per employee is £6,500 per annum, which can make a huge difference to employees’ day-to-day finances.
- Extra nursery funding: as an employer, you’ll also save money on your National Insurance costs. The money you save goes towards the designated nursery as part of the arrangement.
It’s a way for you as an employer to offer childcare support in a way that can tangibly improve your employees’ finances.
Exploring tax-free childcare
The government introduced tax-free childcare in 2017 as a way to help eligible working parents claim tax relief on their childcare costs. In 2024-2025, almost 826,000 families were using the scheme.
How tax-tree childcare works
Only some parents will be eligible for tax-free childcare. They must:
- Have a child under 11 (or a disabled child up to 16*)
- Earn (or their partner earns) at least National Minimum Wage or Living Wage for a minimum of 16 hours a week
- Not earn more than £100,000 a year (also applies to a partner)
- Not be in receipt of Universal Credit or childcare vouchers
If the employee is eligible for tax-childcare, they should apply online to open their childcare account (one for each child). For every £8 they put in, the government will top up with £2 (up to a limit of £500 every three months or £2,000 a year, or £1,000 every three months and £4,000 a year for a disabled child). The childcare fee will come out of this account.
Benefits of tax-free childcare
The key benefit of tax-free childcare is saving 20% of childcare fees, up to the three-monthly or annual caps. The scheme can also be used by employed or self-employed workers, or directors, rather than being restricted to employees.
Comparing childcare salary sacrifice and tax-free childcare
While both types of scheme help keep parenting finance manageable, there are some key differences between the two:
| Childcare salary sacrifice | Tax free childcare | |
|---|---|---|
| Who is eligible? | Employees who won’t go below National Minimum Wage after salary sacrifice | Working people (self-employed, employed, or directors) OR with a working partner and in receipt of eligible benefits. Must be earning National Minimum Wage or above. When one partner’s net income crosses £100,000, the family will become ineligible |
| What kind of childcare is eligible? | Ofsted-registered care provided on a commercial site for 0-5-year-olds | Approved childcare providers including clubs, child minders and nurseries |
| How much can you save? | Up to 28% of fees (for basic rate taxpayers). Higher rate and additional rate taxpayers can save up to 42% and 48% respectively | 20% of childcare fees up to a maximum of £2,000 a year |
| Are there any considerations? | If you run other salary sacrifice schemes, check that employees won’t go below National Minimum Wage | Only available for people earning over and under the thresholds |
Conclusion: Making the right choice
It’s worth knowing that it’s not possible to use childcare salary sacrifice and the tax-free childcare scheme at the same time. So, as an employer, you may be wondering if you should consider introducing a salary sacrifice scheme if employees can just set up their tax-free childcare account to start saving.
The major difference is the amount that eligible employees can save through these schemes: the tax-free saving is capped at £2,000 a year, while through the workplace nursery scheme, employees could save much more, with an average saving of £6,500 per annum. The workplace nursery scheme is also open to employees on any salary (as long as they won’t go below National Minimum Wage), meaning if you have higher-earning staff, they can still take advantage.
Additionally, as an employer-provided benefit, you can reap the rewards of supporting your employees with one of their major costs. This can help your employees feel more positive about your workplace!
Yes, setting up the salary sacrifice scheme could require some effort on your part. But working with a trusted provider, like Maji, can help make it simple. Maji’s wider financial wellbeing platform also helps your employees manage the rest of their money so they can make the most of their savings, and prepare for a bright future with their family.
Frequently asked questions
Can I use childcare benefits on top of the free childcare hours?
Yes. The government has introduced 15 or 30 free childcare hours for eligible parents, which can be used in conjunction with either the workplace nursery scheme or the tax-free childcare scheme.
Which childcare benefits can I get if I earn over £100,000?
You can’t get tax-free childcare if you earn over £100,000, but you may use a workplace nursery salary sacrifice scheme if your employer provides one.
Which childcare benefits can I provide as an employer?
As an employer, you can set up a workplace nursery salary sacrifice scheme for your employees. If you set up a childcare voucher salary sacrifice scheme before April 2018 and some employees remain eligible, you can continue to operate this benefit.
