Childcare Vouchers And Salary Sacrifice

It has become common for employees with children in nurseries to request that they receive some of their salary in the form of childcare vouchers, so as to save Tax and National Insurance. This is usually done by way of the employee making a salary sacrifice.

The employer saves Employer’s National Insurance but incurs administration charges, so the exercise is usually roughly cost-neutral for the employer and is done to help the employee.

It has come to our attention, however that schemes of this nature can be costly to the employer where the employee subsequently takes a period of maternity leave that is either unpaid or paid only at the SMP rate. The vouchers cannot be withdrawn at this stage because they represent a benefit in kind and withdrawal of a benefit during maternity leave would be regarded as discrimination. However, a salary sacrifice cannot be applied to nil pay or SMP. The employer would therefore end up bearing the full cost of the childcare vouchers for the period of maternity leave. The situation in respect of contractual maternity pay would depend on the exact wording of the contract.

Due to the above, all employers should consider the potential cost very carefully before making a childcare voucher scheme available.

If a scheme is already in place, consideration should be given to withdrawing it. However, legal advice should be taken before withdrawing the scheme, particularly where vouchers are currently being provided to one or more employees, in order to avoid breaching employment law.