Tax-free employer childcare vouchers

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The tax break for employer-provided childcare vouchers is to be scrapped. The good news for parents is that they will be replaced by a more generous version direct from the government. But what effect will this have for employers?

New childcare deal

You’ll no doubt have seen the headlines about a generous deal on offer from the government for parents who pay for childcare. If you’re having to fork out for a minder for little Johnny while you’re at work this could mean you’ll receive twice as much in tax and NI-free financial help as is currently possible through an employer-supported childcare scheme (ESC).

What’s on offer?

The tax-free childcare (TFC) scheme will be available to parents where neither earns more than £150,000 per year. They’ll be able to open an online voucher account with a voucher company and have their payments topped up by the government. For every 80p parents pay in, the government will add 20p up to the annual maximum of £1,200 for each child. The vouchers may be used in the same way as they are with ESCs.

Existing tax break

Currently, employers can offer vouchers to staff with children that they can redeem with Ofsted-regulated childcarers. These can be for any value, but the amount qualifying for tax and NI exemption is capped. The maximum annual total tax and NI savings for employees is £933 and for employers, £402 NI. So the new scheme looks like a good deal for parents but less so for employers.

Salary sacrifice

Employers tend to offer ESC under salary sacrifice arrangements. This is where the employee gives up some of their normal pay in exchange for the ESC vouchers. Employees will be happy to drop these in exchange for the new and more generous government scheme as soon as they can (see below). The upshot of this will be that employers will have to pay the employees concerned an equivalent amount of salary to the vouchers they give up. The salary will, of course, be subject to tax and NI meaning employers will lose the £402 per employee NI saving.
Tip. The new scheme won’t affect employers who provide free on-site childcare; this will still count as a tax and NI-free benefit in kind.


The new scheme isn’t set to be introduced until the autumn of 2015. In the meantime, current ESC schemes can continue for existing users and employees who want to join.