Expert view: Childcare costs – why workplace nurseries are more than child’s play
Of the many things which occupy the mind of a working parent or carer with young children, workday childcare is often at or close to the top of the list. It can be a real challenge for parents/carers to a) find appropriate childcare in the right place, at the right time and b) budget adequately for what can be a significant ongoing financial burden. For some this can mean having to make a finely balanced decision between returning to the workplace or staying at home to care for young children.
As a result, it is not surprising that many employers are keen to find ways to support employees back to work, as evinced by the growing popularity of workplace childcare schemes, often delivered via salary sacrifice.
What is a workplace nursery scheme
This was recognised as long ago as 1990 when the government introduced an income tax and National Insurance contribution (NIC) exemption for the provision of a ‘workplace nursery’, provided certain conditions were met. It was intended that this would incentivise employers to provide nursery places for employees’ children, either by setting up a nursery on their premises or collaborating with other employers to provide one (for example on a business park). For several reasons this was rarely practical and, as a result, we have seen a number of independent providers offering workplace nursery schemes.
The way workplace nursery schemes are intended to work is that the employee sacrifices a portion of their salary which is used to fund childcare which, if structured correctly, can be tax and NIC-free. While the portion of salary may be the same, or similar to, directly paid childcare fees, the benefit comes from the income tax and NIC saved in funding those fees out of gross (i.e. pre-tax/NIC), rather than net salary. This is typically a 28% saving for basic rate taxpayers, and 42% for higher rate. The employer also benefits by saving 15% Class 1 employer NIC on the foregone salary.
As with all things employee reward, it is important to ensure that the income tax and NIC position has been properly assessed and understood before the scheme is launched. As many employers know, taking the time to do this up-front will significantly reduce the risk of unexpected liabilities and (just as important) employee disappointment.
A workplace childcare nursery scheme will seek to utilise a specific exemption for employer-provided childcare (see s318 ITEPA 2003). Modern schemes, which often preserve the employee’s access to the setting their children are already attending, were not in prospect when the legislation was drafted, and care should therefore be taken to ensure that the way in which the scheme operates meets the relevant conditions.
Meeting compliance requirements
HMRC has been concerned that these schemes do not always meet the requirements of the legislation and released guidance in July 2024 (see Agent Update 121), which sets out its view on the interaction between these schemes and the exemption’s “partnership conditions”.
These conditions require that the employer be wholly or partly responsible for financing and managing the provision of care. The guidance notes in particular that “HMRC does not consider only paying fixed costs of ‘£x’ (such as a notional £100 per month per employee’s child) to a commercially run nursery already in existence satisfies the requirement”, nor does “an employer occasionally being consulted by nursery providers on broad childcare-related policies”.
A real operational partnership between the employer and nursery is essential if the tax benefits are to be utilised. Employers must satisfy themselves that their financial responsibility is material. It and/or a number of employee parent representatives, should also play an active and regular role in management of the nursery. If this is not the case, then the tax benefits are not available.
It is worth recognising the consequences of this. If the relevant conditions are not met, or if the salary sacrifice arrangement is faulty, the exemption falls away. The employee will then be subject to income tax on the greater of the salary foregone or the value of the childcare benefit provided (if different), with the NIC advantage also cancelled for the employer. It can unwind the potential savings and could even result in interest and penalties related to the underpayments of tax and NIC if it has been incorrectly assumed that the provisions were met.
The devil is in the detail
Workplace nursery arrangements can be a valuable part of a wider reward proposition, but the detail matters. As mentioned, the employer’s role in financing and managing the provision of the childcare in particular should be genuinely substantive and supported by evidence. Where that role is more nominal, the risk of challenge increases and an employer may choose instead to implement the scheme to provide practical support to its employees but without the tax incentive and without the financial and management responsibility for the nursery.
An independent specialist assessment of the scheme’s operating model, as well as a cost v benefits analysis, ahead of implementation, will help ensure that well intended support translates into compliant, sustainable benefit delivery.
