Help from your employer with childcare costs
Many employers offer some help with childcare. This could be:
A workplace nursery. This is a nursery operated by or for your employer. Free or subsidised places at the nursery count as a tax-free perk of your job. There is no limit on the value of this form of help.
Direct payment for childcare. Your employer may pay direct for childcare through any eligible childcare arrangement (which is defined in the same way as for Working Tax Credit purposes). This is a tax-free benefit up to a maximum of £55* a week, regardless of the number of children you have. Any extra your employer pays is taxable unless you earn at a rate of less than £8,500* a year.
Childcare vouchers. These are tax free up to £55* a week (or up to £243* a month), regardless of the number of children you have. The vouchers can only be used to pay for eligible childcare. Help with childcare costs may be an extra perk of your job. But often it is available through a salary sacrifice scheme. This means you give up some of your pay in return for the help with childcare. Before agreeing to a salary sacrifice, weigh up the pros and cons.
Salary sacrifice
Pros
You don’t pay tax or National Insurance on help with childcare costs, whereas you pay both on your salary over £110* a week.
You might qualify for higher state help that varies with income, such as Child Tax Credit.
Cons
Might reduce any sick pay or maternity pay you get or the amount of occupational pension you build up, because these are all usually based on your pay.
Might reduce the state additional pension you build up, because it is currently linked to pay.
Employer help or tax credits?
You can’t claim the childcare element of Working Tax Credit for any part of your childcare costs that is being met by your employer. So, if you are eligible for both, you’ll need to check which would make you better off. Some points to consider are:
A free place in a workplace nursery is always the best deal financially.
If you are choosing between tax credits and a salary sacrifice scheme for childcare vouchers, most people are better off claiming the tax credits.
If your childcare costs are more than £175* a week (one child) or £300* a week (two or more), consider asking your employer to pay for the excess not covered by tax credits.
*Rates shown are for the tax year 6 April 2010 to 5 April 2011.