The HMRC Foundation
The workplace nursery salary sacrifice scheme is grounded in HMRC guidance, specifically the Employment Income Manual provision at EIM22001 and Appendix 11 of HMRC's 480 publication on employer supported childcare. These HMRC documents confirm that no income tax applies to nursery fees paid through a qualifying employer and nursery partnership, provided the conditions are met.
The conditions are specific: the employer must formally finance and manage the nursery setting, the nursery must be OFSTED registered and not in a private dwelling, and the arrangement must be made available to all eligible employees. These conditions are not optional elements of the scheme. They are all required for the salary sacrifice of nursery fees to be treated as tax free by HMRC.
The Employer and Nursery Contract
The formal contract between your employer and your nursery is a central feature of the scheme. This contract establishes the terms of the financial partnership, including the monthly contribution the employer makes to the nursery. The recommended minimum contribution is £150 per month per employee using the scheme, though employers are encouraged to contribute at least the full amount of their employer NI saving.
This contract runs for a minimum of 12 months. During this period, the employer's financial commitment to the nursery continues regardless of changes in the employee's circumstances. If an employee leaves their job or moves their child to a different nursery during the contract period, the employer's obligation to the nursery continues until the minimum term has been fulfilled.
The Employee's Salary Sacrifice Agreement
Alongside the employer and nursery contract, you as the employee sign a salary sacrifice agreement with your employer. This formalises the adjustment to your employment contract, specifying the amount of salary to be sacrificed and the duration of the arrangement.
The salary sacrifice agreement aligns with the nursery contract, running for a minimum of 12 months. After this initial period, the arrangement continues on a rolling monthly basis unless either party gives notice to end it.
What Happens During Leave
If you go on maternity, paternity, or other long term leave and your pay falls below national minimum wage as a result of the salary sacrifice, the benefit must be paused. This is a legal requirement, as employees cannot have their take home pay reduced below minimum wage through salary sacrifice. The scheme can be reinstated when you return to a sufficient salary level.
For many parents on statutory maternity pay, this means the scheme is paused during the main period of leave and reactivated when they return to work. It is worth factoring this into your planning when deciding when to start the scheme.
Adjusting for Variable Fees
Some families have nursery fees that vary from month to month based on attendance or other factors. The salary sacrifice nursery fees arrangement can accommodate this variation, provided that any amendments to fees are communicated to the specialist team before the invoice is issued to the employer. This flexibility means parents with varying fee schedules are not excluded from benefiting.
The Administration Fee
The specialist team charges a 12% administration fee on the nursery fee, which is included in the salary sacrifice amount. Importantly, because this fee is also part of the pre tax sacrifice, the effective cost is lower. For higher rate taxpayers, the effective cost of the 12% fee is approximately 7%. For additional rate taxpayers, it is around 6.4%. And for basic rate taxpayers, it is around 8.2%.
Even after this fee, the net saving for eligible parents remains substantial, particularly for those on the higher or additional rates of income tax.
Conclusion
Understanding the rules and contract structures behind workplace nursery salary sacrifice demystifies what can initially seem like a complicated arrangement. The HMRC requirements are clear, the contracts are well structured, and the savings on salary sacrifice nursery fees are substantial and predictable. With specialist support, navigating these rules is entirely manageable for both parents and employers.