What is 'salary sacrifice' for childcare?

'Salary sacrifice' is a scheme that allows an employee to give up the right to receive part of the pay due under their contract of employment in return for the employer’s agreement to provide the employee with some form of non-cash benefit.

Under the terms of the Employer Supported Childcare Vouchers scheme, an individual will sacrifice part of their cash-pay (taxable salary) in return for childcare vouchers, which are exempt from tax and National Insurance contributions (NICs). This means that the employee saves tax and NI on the amount of the voucher, while the employer also makes NIC savings on the same amount.

However, it also means that the amount of earnings on which NI is paid is reduced. This may take an individual’s earnings below the Lower Earnings Limit (LEL), which can have long-term implications.

Salary sacrifice schemes are offered to employees on a range of benefits such as computers, bicycles, mobile phones and childcare. HM Revenue and Customs oversees salary sacrifice schemes because they operate under tax law rather than employment law.

There were some changes in the way the scheme operates from 6 April 2017.

Note: This content is provided as general background information and should not be taken as legal advice or financial advice for your particular situation. Make sure to get individual advice on your case from your union, a source on our free help page or an independent financial advisor before taking any action.