Introduction
When it comes to managing the cost of childcare, knowing your options can be confusing. It’s important to understand the key differences between childcare salary sacrifice vs. tax-free childcare.
A common misconception is that childcare salary sacrifice is the same as the government’s childcare vouchers scheme which ended in 2018.
But it’s not – childcare salary sacrifice is recognised by HMRC and still available for companies who want to help their employees save money.
There’s also the government’s tax-free childcare scheme, which can help employees save even more. Keep reading to understand the key differences between the two.
Childcare salary sacrifice
Childcare salary sacrifice is an arrangement where an employee agrees to give up part of their pre-tax salary in exchange for childcare vouchers or direct payment to a childcare provider (like a nursery). This reduces the employee’s taxable income, so they pay less in tax and National Insurance. Employees save a minimum of 28% of their childcare costs.
How it works:
- Agreement: You and your employee agree on the amount to be sacrificed
- Provision: You provide childcare vouchers or make direct payments to your employee’s chosen childcare provider
- Tax savings: The sacrificed amount is not subject to tax or NI, reducing your employee’s overall taxable income
Benefits:
- Reduces taxable income for your employees, leading to savings on tax and NI
- Can be used with registered childcare providers
- Available to all employees, so long as the amount sacrificed does not take their income below the National Minimum Wage
Limitations:
- Requires employer participation
- May impact other salary-related benefits like pensions and loans
- Childminding does not qualify
Government tax-free childcare scheme
The government’s tax-free childcare scheme is a relatively new initiative. It’s been available since April 2017 to help working parents with the cost of childcare. It replaced the childcare vouchers scheme in October 2018 and offers a more flexible approach.
How it works:
- Account setup: Your employee sets up an online childcare account through the government website
- Deposit: Your employee deposits money into this account
- Government top-up: For every £8 deposited, the government adds £2, up to a maximum of £2,000 per child per year (£4,000 for a child with a disability)
- Payments: Your employee uses the account to pay their registered childcare provider directly
Benefits:
- Government contributes 20% of childcare costs, up to the specified limit
- Available to self-employed individuals as well as employees
- Not dependent on employer participation
- Can be used in conjunction with other childcare benefits like 30 hours of free childcare for 3–4-year-olds
Limitations:
- Both parents (or the single parent) must be working and earning under £100k and at least £152 per week
- Not available if either parent earns over 100k per year
Key differences between childcare salary sacrifice vs. tax-free childcare
While both schemes aim to reduce the financial burden of childcare, they differ in a few significant ways:
- Who can claim it?
- Childcare salary sacrifice: Requires employer participation and is only available to employees. Savings depend on current tax and NI rates.
- Tax-free childcare: Available to both employed and self-employed parents without needing employer involvement. The scheme provides a straightforward government top-up.
- How do you save?
- Childcare salary sacrifice: Reduces taxable income, providing savings on tax and National Insurance contributions
- Tax-free childcare: Offers a direct top-up from the government, adding 20% to contributions
- How does it impact other benefits?
- Childcare salary sacrifice: Can affect salary-based benefits and entitlements, such as pensions and loans
- Tax-free childcare: No impact on other salary-based benefits
- What are the limits?
- Childcare salary sacrifice: No specific usage limit, but total savings depend on tax and NI contributions
- Tax-free childcare: Capped at £2,000 per child per year
Conclusion
Understanding the differences between childcare salary sacrifice vs. tax-free childcare can help your employees choose the best option based on their circumstances. While both schemes offer valuable financial support, the right choice depends on factors like employment status, income level and employer participation.
Mintago makes implementing childcare salary sacrifice quick and drama-free. Let’s see how much we could save your employees on childcare costs.
For further details, contact us today.