The childcare vouchers tax break lets employees who joined the scheme before 4 October 2018 give up part of their gross salary in exchange for vouchers of the same value, with no income tax or National Insurance charged on the sacrificed amount. For a basic rate taxpayer using the full allowance, that works out to around £800 a year. The scheme is closed to new entrants, so this only matters if you’re already on it — and the real question for most people still using it is whether to stay or switch to Tax-Free Childcare.
How the Salary Sacrifice Saves You Tax
You agree with your employer to give up a slice of your gross pay. In return, your employer provides childcare vouchers of the same value. Because the sacrificed pay never counts as taxable earnings, no income tax or employee National Insurance is charged on it. Your employer also saves the employer’s National Insurance on that portion, which is why many businesses set these schemes up in the first place.
The exemption sits in Section 270A of the Income Tax (Earnings and Pensions) Act 2003, which carves qualifying childcare vouchers out of the general earnings charge and the benefits-in-kind rules.1Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 270A Directly provided workplace nurseries run under a separate provision and aren’t part of the voucher scheme.2Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 318
The Tax-Free Limits
How much you can sacrifice tax-free each month depends on your income tax band:
- Basic rate (20%): £55 a week or £243 a month
- Higher rate (40%): £28 a week or £124 a month
- Additional rate (45%): £25 a week or £110 a month
These caps are fixed in statute and have not moved since the scheme closed to new entrants.3GOV.UK. Expenses and Benefits Childcare – Whats Exempt Anything above the limit is taxed as a benefit in kind, so overshooting creates a tax bill rather than a saving.
Your employer decides which band applies to you through a basic earnings assessment carried out when you join and then at the start of each tax year. Once set, that band holds for the whole tax year even if your pay changes.4GOV.UK. Employer-Supported Childcare Guidance for Employees
What You Actually Save
A basic rate taxpayer taking the full £243 a month sacrifices £2,916 over the year. The income tax saved is around £583, and employee National Insurance adds more on top, bringing the total to roughly £800 a year.
Higher rate taxpayers sacrifice less each month but at a higher marginal rate, so the income tax saving lands at around £595 a year on the £1,488 annual allowance. National Insurance savings shrink at higher earnings because pay above the upper earnings limit attracts a lower employee rate. Additional rate taxpayers see a similar income tax saving on their £1,320 annual allowance, with minimal NI benefit at that income level.
There is a catch that often gets missed. Salary sacrifice lowers your official gross earnings figure, and that figure feeds into statutory maternity pay, statutory sick pay, employer pension contributions calculated as a percentage of salary, redundancy pay, and the income figure mortgage lenders will assess. If any of those matter to you in the near term, the £800 saving may cost you more than it delivers.
Which Childcare Qualifies
The exemption only applies if the care meets the conditions in Section 270A. The child must be yours (including stepchildren) and maintained at least partly at your expense, or live with you and someone with parental responsibility. Eligibility runs until 1 September following the child’s 15th birthday, or 16th if they have a disability.1Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Section 270A
The provider must be registered or approved by Ofsted, the Care Inspectorate in Scotland, or the equivalent body in Wales or Northern Ireland. Care by a relative in the child’s own home doesn’t qualify, even if that relative is a registered childminder. The care needs to take place outside the child’s home, or be given by an approved childminder at the childminder’s premises.
Should You Switch to Tax-Free Childcare
Anyone still on vouchers should check whether Tax-Free Childcare would pay them more. Under Tax-Free Childcare, for every £8 you pay into a government-held account, the government adds £2, up to £2,000 per child per year, or £4,000 for a disabled child.5GOV.UK. Tax-Free Childcare Getting the full £2,000 means spending £10,000 a year on that child’s care.
The structural difference matters more than the headline numbers. Vouchers are a per-parent benefit regardless of how many children you have. Tax-Free Childcare is a per-child benefit regardless of how many parents work. So the answer depends on your family shape:
- Two working parents, one child, basic rate tax: vouchers can deliver up to around £1,600 combined if both parents claim. Tax-Free Childcare tops out at £2,000 for that child. If costs are high, Tax-Free Childcare wins.
- One working parent, one child, basic rate tax: vouchers save about £800. Tax-Free Childcare could deliver up to £2,000 on high enough costs and is almost always better.
- Two working parents, several children in paid care: Tax-Free Childcare gives you £2,000 per child, while vouchers stay capped per parent. Multiple children usually tip the balance heavily toward Tax-Free Childcare.
The switch is one-way. Once you leave the voucher scheme for Tax-Free Childcare, you cannot rejoin.6GOV.UK. Childcare Vouchers and Other Employer Schemes The government’s childcare calculator on gov.uk will model your own numbers, and it’s worth using before committing.
Universal Credit and Tax Credits
Salary sacrifice reduces your reported gross income, which can lift the Universal Credit or tax credits your household qualifies for. That’s a real second-order benefit. What you cannot do is double count the same spending. When you report childcare costs for the Universal Credit childcare element, subtract the value of any vouchers used from the total.7Low Incomes Tax Reform Group. Universal Credit Childcare Support Interaction With Other Schemes
If your monthly childcare bill is £500 and you receive £243 in vouchers, you can only report £257 as your out-of-pocket cost. Claiming the full £500 alongside the vouchers creates an overpayment, and the DWP will recover it. For lower-income households, the Universal Credit childcare element sometimes provides more support than vouchers do on their own, which is another reason to run the calculator.
Maternity Leave and Statutory Pay
Following an Employment Appeals Tribunal decision, childcare vouchers obtained through salary sacrifice are treated as remuneration rather than a non-cash benefit, so employers are generally not required to keep providing them during unpaid maternity leave. If your employer pays enhanced maternity pay above the statutory amount, sacrifice can continue from that enhanced portion. You cannot sacrifice from statutory maternity pay or statutory sick pay.
The same logic reaches other calculations tied to your contractual earnings figure: statutory paternity pay, shared parental pay, percentage-based pension contributions, and redundancy payments based on weekly pay. All get pulled down by the sacrifice. If a period of statutory leave is on the horizon, review whether keeping the sacrifice at its current level still makes sense.
Staying on the Scheme
There’s no announced end date for existing users. You can keep receiving vouchers indefinitely, but three conditions have to hold:
- You stay with the employer who adjusted your wages for the scheme on or before 4 October 2018. Changing jobs means permanent loss of access.
- Your employer keeps running the scheme. If they close it, you lose access.
- You don’t take an unpaid career break of more than one year.
These are absolute.6GOV.UK. Childcare Vouchers and Other Employer Schemes There is no route back in once eligibility is lost. As the population of voucher users shrinks, some employers will decide the administration isn’t worth it. If your employer hints at closing the scheme, run the Tax-Free Childcare comparison straight away rather than waiting until the choice is made for you.