Expenses and benefits: childcare

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1. Overview

As an employer providing childcare to your employees, you have certain tax, National Insurance and reporting obligations. Most workplace nurseries and childcare voucher schemes are exempt.

There are different rules depending on whether:

  • you provide a workplace childcare facility yourself
  • your employees pay for childcare themselves and you pay them back
  • you contract directly with a childcare provider, such as a commercial nursery or a childminder
  • you give your employees childcare vouchers

Childcare voucher and directly contracted childcare schemes have closed to new applicants.

Employer-supported childcare is normally provided through salary sacrifice. This means an employee gives up part of their salary in return for a non-cash benefit.

Restarting childcare vouchers or directly contracted childcare

An employee can choose to take a break from getting your childcare vouchers or directly contracted childcare. They can start again as long as the following apply:

  • it’s within 52 weeks of the date they stopped
  • you’re still their employer
  • they have not told you that they want to leave your scheme (for example, because they’ve started using Tax-Free Childcare)

If an employee starts using Tax-Free Childcare

You must stop giving your employee childcare vouchers if they tell you they’ve started using the Tax-Free Childcare scheme.

If this means stopping or changing a salary sacrifice arrangement, you must also update your employee’s contract and your payroll software.

Refunding childcare vouchers

You need to deduct PAYE tax and National Insurance contributions before making the refund to employees. This applies to both current and former employees.

If your company no longer exists, the voucher provider may refund the employee directly. This will depend on the contract between your company and the voucher provider.

2. What's exempt

You might not have to report anything to HM Revenue and Customs (HMRC) or pay tax and National Insurance.

Workplace nurseries

If you provide places for employees’ children in a workplace nursery, you do not have to report or pay anything. To be exempt, a workplace nursery must:

  • have the appropriate registrations and approvals
  • be available to all your employees
  • provide childcare for your employees’ children, or children they have parental responsibility for
  • provide childcare up to the maximum age its registration and approval allows for

The nursery does not have to be at your workplace - it can be in other premises that you manage and finance, as long as they’re not a private residence.

Commercial childcare or vouchers

You can provide a fixed amount of employee-supported childcare to employees without having to pay or report anything. They must have joined your childcare or voucher scheme and had their wages adjusted on or before 4 October 2018.

To be exempt, the childcare you provide (or provide vouchers for) also needs to meet the criteria for workplace nurseries.

Certain low-paid employees may be excluded from the requirement for childcare to be available to all employees. HMRC’s technical guidance on childcare voucher exemption has full details.

Limits for exemption

For any employees who applied to join a childcare scheme you run before 6 April 2011, the limit is £55 a week, or £243 a month.

There are different rules for employees who joined employer-supported childcare schemes on or after 6 April 2011.

The main difference is that the limit for these employees depends on the rate of Income Tax they pay. The limits are shown in the following table:

Rate of Income Tax Weekly exempt limit Monthly exempt limit
Basic £55 £243
Higher £28 £124
Additional £25 £110

You’ll need to carry out a ‘basic earnings assessment’ to work out the correct rate, and keep certain records. HMRC’s guide to employer-supported childcare has full details.

3. What to report and pay

If the childcare you provide is not exempt from tax and National Insurance, you must report the costs to HM Revenue and Customs (HMRC).

Commercial childcare

If you provided commercial childcare above the exempt limit, you must:

Childcare vouchers

If you provide childcare vouchers to employees above the exempt limit, you must:

Childcare your employees pay for and you pay them back

If you cover the costs of employees’ childcare in any of the following ways, this counts as earnings:

  • paying them back for their childcare bills
  • providing a cash allowance to cover childcare costs
  • providing additional salary to meet the cost of childcare

In most cases, you’ll need to:

  • add the amount you pay the employee to their other earnings
  • deduct and pay PAYE tax and Class 1 National Insurance through payroll

4. Work out the value

The amount you need to report depends on the kind of vouchers, and how you provide them.

Commercial childcare or vouchers

The value to use is the cost of the childcare above the exempt limit.

Childcare your employees pay for and you pay them back

Use the amount that you pay the employee back for childcare costs.

5. Technical guidance

The following guides contain more detailed information: