Paying your nanny with childcare vouchers

January 29, 2016

Childcare vouchers help parents to save money

The vouchers are offered by some employers and enable you to pay for childcare, including your nanny, out of your salary before tax and National Insurance (NI) have been taken away.

Some generous employers give vouchers on top of salary, but generally you’ll have to sacrifice part of your salary to get vouchers equal to that amount.

Childcare vouchers can be used to pay for childcare with a registered childcare provider. That means your nanny will need to be registered with Ofsted for you to use them. If your nanny isn’t registered it could be worth paying for, or contributing to, the cost of registration so that you can benefit from childcare vouchers.

How salary sacrifice works

You can save money by sacrificing some of your salary. For example, a £1,000 of salary is worth only around £700 once tax and NI have been taken off. Under a salary sacrifice scheme you’d get vouchers worth £1,000, making you £300 better off.

The Government sets monthly limit for vouchers based on tax bands.  Some employers will allow employees to take more than the capped amount in vouchers, but anything over the Government amount limit won’t be tax free.

Both parents can use childcare vouchers, so families with two working parents can enjoy double the allowance.

If you want to use vouchers let your payroll company know that you’re paying part of your nanny’s salary this way.

What if my employer doesn’t offer them?

Your employer will have to pay an admin fee for using a voucher scheme, which could put them off, particularly if the employer is a small business. But it’s worth asking reluctant employers to consider setting up a scheme as they don’t pay NI on the salary that’s used for vouchers, so should save some money. And there’s nothing to stop your employer from setting up their own scheme and issuing their own salary-sacrifice vouchers. They will need to design a voucher that makes it clear it’s a self-administered scheme, showing the name of the employee and the of month of deduction.

Any cons?

Because you’re giving up some of your salary for vouchers your salary will effectively be reduced and this can have an impact on pension contributions and maternity leave payments.

Childcare vouchers reduce your eligibility for tax credits, so some families may be worse off. You can use the Government’s calculator to check if it’s worth taking part in a voucher scheme.

From early 2017 voucher schemes will no longer accept new entrants. If you’re already using a scheme you’ll be able to continue as long as your employer offers the scheme. The system will be replaced by the Tax-Free Childcare Scheme.