Paying for childcare vouchers through salary sacrifice

In a salary sacrifice scheme, the cash salary paid to your employee is reduced by the amount that you pay towards their childcare. This amount is referred to as the “sacrifice”. You pay the sacrificed amount direct to your employee’s childcare provider through a childcare voucher scheme.

If an employee’s salary has been reduced because of a sacrifice scheme, their benefits can be affected, so employers should calculate employer-benefits – such as pension contributions, redundancy payments, bonuses and pay increases – based on the employee’s salary before the sacrifice. This is referred to as the “notional” salary. It is good practice for you to protect the benefits you provide.

If you offer vouchers through a salary sacrifice scheme, the only cost involved in implementing a childcare voucher scheme will be the management fee you pay to the voucher company.

These fees will vary and are often negotiable. Some voucher companies may charge a set rate, while others may charge a percentage of the overall value of childcare vouchers provided by you.

According to the Daycare Trust, this generally ranges from 5% to 8%, although some companies may charge as little as 1.5%. The savings you make from reduced national insurance contributions usually exceed the management fee charged by the voucher company.

Employers should also n

ote, that while the new rules on the VAT treatment of certain benefits provided under salary-sacrifice schemes will not have a direct impact on the provision of childcare vouchers, organisations may no longer be able to recover VAT on administration fees from the voucher provider. Read more about the changes on the HMRC website.
 

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