What is a Salary Sacrifice?
Under childcare vouchers schemes, employees may give up, or ‘sacrifice’, part of their salary in exchange for childcare vouchers, for use within the various childcare vouchers schemes available such as that at Early Years Vouchers. Anyone sacrificing part of their salary in this way will receive the same amount back in childcare vouchers, but with the added bonus that you won’t have to pay tax or national insurance on this amount. So for instance, each £700 you sacrifice in terms of salary will be equivalent to £1,000 after the tax and insurance benefits are added in.
What are the possible implications of salary sacrifice?
When you join a salary sacrifice scheme, your actual salary is reduced by an agreed amount. Unfortunately, any benefit which is based upon your salary might also be affected. Sometimes salary sacrifice arrangements might reduce your entitlement to other benefits, but in other cases salary sacrifice can actually increase these other benefits.
Will salary sacrifice affect my maternity pay?
Statutory Maternity Pay (SMP) is based on your average earnings over a period before your maternity leave starts. Childcare vouchers, or employer childcare vouchers are not taken into account in the calculation, so using these vouchers during this period will reduce your entitlement to SMP.
If your employer pays more than the statutory minimum during maternity leave, then the effect of using childcare vouchers depends on exactly how your employer calculates maternity pay. Your employer should be able to advise you whether using childcare vouchers will affect your benefits.
Can you use childcare vouchers whilst on maternity leave?
Being on maternity leave does not prevent you from using childcare vouchers: however, if your pay is low while you are on maternity leave, you should check with your employer whether you are still earning enough to participate in a salary sacrifice arrangement.
Will the use of childcare vouchers affect paternity pay?
If you are expecting to have a period of paternity pay, you should consider whether using childcare vouchers will reduce your entitlement. You can continue to receive childcare vouchers while you are on paternity leave, but you should check with your employer that your earnings remain high enough to participate in a salary sacrifice arrangement.
Will salary sacrifice affect tax credit awards?
Using childcare vouchers can affect tax credits, so it’s worth checking the HMRC’s online calculator to see whether or not childcare vouchers will save you money. If your childcare costs exceed £175 per week (or £300 per week if you have more than one child in childcare), then you can always use childcare vouchers to pay for any care above these limits without affecting your tax credits. If you are claiming tax credits to help with your childcare costs, you must inform the Inland Revenue when you start using childcare vouchers.
Will salary sacrifice affect my state pension?
As long as you pay the minimum requirement for National Insurance contributions, using childcare vouchers should not affect your basis State Pension. However, there may be a small reduction in your Second State Pension. Your local tax office should be able to give you more information.
Will salary sacrifice affect my company pension?
Your employer may have made arrangements for your company pension scheme rules to be altered, so that your company pension isn't affected by childcare vouchers. If they have not done this, then your pension contributions may decrease and your eventual pension entitlement may be affected. Your employer should be able to give you further information.
Will salary sacrifice affect any private insurance policies you might have?
If you have any insurance policies which are based on your salary, such as life insurance, sickness insurance or unemployment protection, then it is possible that using childcare vouchers could reduce the amount you would receive from these policies. If life insurance is provided through your company pension scheme, your employer may have made arrangements for the scheme rules to be altered, so that your benefits aren't affected by childcare vouchers. Your employer should be able to give you further information.Back to Frequently Asked Questions