Salary Sacrifice Schemes



Childcare Vouchers Salary Sacrifice Schemes

In understanding how childcare vouchers work as part of a salary sacrifice scheme it is important to define exactly what a 'salary sacrifice scheme' is...

What is a salary sacrifice?

A salary sacrifice is where an employee gives-up part of their gross income/ wages/salary that they are due as part of their employment contract for an alternative non-cash benefit. A salary sacrifice is often offered to employees as part of a flexible benefit package provided by their employer.

Why choose a childcare voucher salary sacrifice scheme?

A salary sacrifice provides tax savings. By deducting an amount of money from an employees earnings using a salary sacrifice in order to pay for childcare using childcare vouchers for example, means that the amount of money sacrificed is free from income tax and national insurance contributions (NIC's).

Essentially, a proportion of a parents income to pay for day care, nurseries and other forms of registered childcare are not classed as a 'benefit in kind'. Childcare vouchers can therefore become an excellent benefit for employees.

The  childcare voucher savings, in regards to the salary sacrifice, reflects the different tax-rates of different employees - note how those in the 20% and 40/45% tax brackets differ in their savings.

Employers also benefit  from such childcare voucher schemes through reduced national insurance contributions, and by providing a cost-neutral benefit to their employees.

Consideration of a Childcare Voucher Salary Sacrifice

Because an employee is entering into a salary sacrifice arrangement that affects their tax and income, close consideration of it's impact on other earnings-related benefits (both Government benefits and employee benefits) should be understood.

Salary sacrifice in regards to a reduced income may impact pension schemes, statutory maternity pay, working and  child tax credit  or others. Contact a member of the Early Years Childcare Vouchers team for more help in understanding the salary sacrifice childcare voucher scheme.

Government, Tax and Legislation

The HMRC website states that a salary sacrifice is a matter of employment law, not tax law. If an employee chooses to accept a salary sacrifice in return for a non-cash benefit, they are giving up their right to future cash remuneration to that value. It's good practice to always take specialist legal advice whether you are an employer or employer to ensure that the salary sacrifice achieves it's aims.

Visit the Government Legislation section to help understand the financial impacts of  childcare vouchers and tax  in more detail, in addition to other considerations  before setting-up a scheme.