Cost of living: Childcare costs and salary sacrifice
Many employers have been asking us how they could support their employees financially through the cost of living crisis. We have commented previously on some tax saving tips here.
One question which is cropping up is whether employees can salary sacrifice their childcare costs, and in particular in relation to schemes offered by commercial providers. The simple answer is they can, but it is never that simple.
We look below at how a commercial scheme could operate and the potential tax and NIC consequences.
How does a scheme typically work?
Broadly, under these schemes:
- the employee enters into a salary sacrifice, giving up an amount of pay equal to the cost of the nursery place which is to be provided
- the employer pays for a nursery place for the employee’s child
- the employer also pays the nursery an additional nominal sum e.g. £100 per month towards the financing of the nursery
- the employer appoints someone else e.g. the employee or scheme promotor to act as their ‘agent’ at meetings of the nursery management committee.
Additionally, as the employer is paying the nursery fees, the employee is not awarded the 20% top-up contribution by the government to their childcare costs.
HMRC view
A tax exemption is available to an employer (or group of employers) when it provides its employees with childcare facilities. While there are many conditions to meet in order for the exemption to apply, one condition is that the employer is wholly or partly responsible for financing and managing the provision of the childcare.
To meet this condition, HMRC guidance states there must be some real and substantial financial commitment to the nursery e.g. an agreement to meet a proportion of the overall costs or indemnify against losses. HMRC guidance also states management of a nursery includes close involvement such as:
- authority to appoint and monitor those looking after the children
- close involvement with the care provided
- allocation of places and conditions under which the care is provided.
If, assuming for the purposes of this article, the salary sacrifice arrangement is an effective arrangement, it is HMRC’s opinion that these types of commercial schemes do not meet the financial and management condition. As highlighted in steps 3 and 4 above, it is considered no more than buying a place in nursery.
What’s the risk?
Under salary sacrifice arrangements, the employee’s net pay increases due to the income tax and NIC savings made, and the employer makes employer’s NIC savings too. Due to the cost of childcare, employees and employers might be tempted to enter into such arrangements by the significant tax and NIC savings advertised by scheme promotors.
However, if the scheme does not meet the strict conditions for the tax exemption to apply, or the salary sacrifice is not effective, the employer could be left facing significant bills to repay the tax and NIC savings made.
How we can help?
We have supported clients with reviewing their arrangements to help them make an informed decision before they enter schemes. We also highlighted the potential risks and tax or NIC exposures.
If you are thinking of entering into a similar scheme or are already signed-up but would like an independent view, please contact Glen Huxter.
