Workplace nursery exemptions: what you need to know

Despite the seemingly complex rules, the workplace nursery exemption can significantly help working parents as well as employers with childcare costs.

The affordability of childcare continues to be a significant challenge for working parents and one which reward and benefits professionalsare consistently asked about.

One option is that employers can make use of the workplace nursery exemption where parents enjoy savings on tax and National Insurance (NI) and the employer saves on employer NI, provided that the parent uses the employer’s own onsite workplace nursery or another nursery in a “partnership” arrangement.

The complexity of the rules around these schemes can often be offputting and it is easy to misinterpret them without the right advice.

Indeed, HMRC has recently opened enquiries into several third-party organisations which offer a certain type of these schemes directly to parents or employers.

There have been reports of taxation needing to be repaid and the implications for parents and employers have undoubtedly raised further concerns.

With the right people in your corner, it can be simple and we've successfully utilised the exemption for over 20 years in partnerships with both private sector and government employers.

What is the workplace nursery exemption?

We have been supporting the needs of working families and their employers for over 35 years.

As a result, we have worked hard to establish robust and trusted schemes for both workplace nurseries, and workplace nursery partnerships which provide parents with reassuringly high-quality and convenient care supported by their employer.

The workplace nursery exemption is a full income tax and NI for employees/employers. It was introduced to incentivise employers to add nursery provision on their premises, or to encourage smaller employers (who might not want to operate a nursery of their own) to band together and set up a nursery.

The exemption is effective, and is well understood, when utilised by employers that have their own nursery setting. It creates a saving of 30%+ on nursery fees (which can amount to many £000s a year) for working parents.

The recent update from HMRC addresses the partnership requirements of the exemption which relates to the schemes that seek to create a partnership between an employer and an existing (but not on premises) nursery setting.

The updated guidance states that, under the partnership requirements:

“Responsibility for financing, either wholly or partly, means the employer must accept material financial responsibility. This requires more than purchasing places at a commercial nursery and making contributions to fixed costs.”

When we made our own enquiries, via HM Treasury, HMRC were even clearer:

“Employers must accept the financial risk associated with running a childcare facility, which is likely to take the form of contributing to overall costs and is such that there is also joint responsibility for any losses.”

The issue here is that some employers have entered into partnerships where their role couldn’t reasonably be described as having ‘joint responsibility for any losses’.

To be clear, this test does not apply to nurseries located onsite where the employer provides the premises.

Our experience is that some employers are phasing out these partnership arrangements in response to the HMRC update but are dismayed at the dearth of alternative options – particularly in how to replace a benefit that is providing often £’000s of savings for their people.

What are the alternatives?

If faced with a need to review your own salary sacrifice arrangements for nursery fees our own advice is first to seek out professional third-party tax advice to reassess the use of the exemption.

Our focus is to explore more widely the ways in which an employer can support its people with the challenges of providing care and education for their children while meeting their professional responsibilities.

The right solution varies by employer, but our advice is to ensure that support is as inclusive as possible.

Single-site employers that have relatively large populations attending the worksite still see gains in improved recruitment and retention through the provision of a worksite nursery.

In our latest client employee survey, over 8 in 10 of those who used an employer-sponsored nursery place said they were more likely to stay with their employer, and that the benefit improved their productivity, made it easier to do their job and enhanced their wellbeing.

For multi-site employers that have the same need to attract and retain the right talent and are equally interested in providing productivity and wellbeing wins, we recommend introducing a back-up care benefit – one that provides access to high-quality care and education for employees and their dependants when regular arrangements breakdown.

Because the care is available for adult dependants as well as children of all ages this is a highly equitable benefit.

Back-up care isn’t available via salary sacrifice but the investment provides a consistent and robust ROI (one of the NHS Trusts we work with reported a £2m productivity saving), according to Bright Horizons client and user feedback surveys.

Whatever form of work and family support is right for your organisation, the positive impacts that await include higher levels of productivity, enhanced performance and improved employee wellbeing, engagement and retention.