Childcare Salary Sacrifice: Complete Guide for Employers

Childcare salary sacrifice is one of the most misunderstood benefits in UK employment. The scheme closed to new entrants in October 2018, but existing members retain their rights — and employers continue to run legacy schemes for thousands of employees across the UK. Meanwhile, the interaction with Optional Remuneration Arrangement (OpRA) rules and the availability of Tax-Free Childcare as a government alternative creates a landscape that many HR teams find genuinely confusing.

After 20 years working in the benefits space, I still encounter employers who either don’t realise they have obligations to existing scheme members, or who incorrectly assume the employer NI savings still apply. Let me set the record straight.

How childcare salary sacrifice works

Under a childcare voucher salary sacrifice arrangement, an employee gives up part of their gross salary in exchange for childcare vouchers (or direct employer-supported childcare provision). The vouchers are exempt from income tax and employee NI up to certain limits, and the employee uses them to pay registered childcare providers.

The maximum exempt amounts for 2025-26 are:

Tax band	Weekly limit	Annual limit
Basic rate (20%)	£55	£2,860
Higher rate (40%)	£28	£1,456
Additional rate (45%)	£25	£1,300

These limits have not changed since the scheme was introduced and are not index-linked. For Scottish taxpayers, the limits are determined by the equivalent UK rate band, not the Scottish rate — HMRC applies the basic, higher, and additional rate thresholds to determine which limit applies.

The October 2018 closure — and what it means

The government closed childcare voucher schemes to new entrants from 4 October 2018, replacing them with Tax-Free Childcare (more on that below). However, this closure only applies to new joiners. Employees who were already members of a scheme on or before 4 October 2018 can continue to receive vouchers indefinitely, provided they remain with the same employer and stay in the scheme continuously.

Key points on existing member rights:

• Continuity is essential. If an employee leaves the scheme (even temporarily) or leaves the employer, they cannot rejoin. This is a one-way door.
• Maternity and other statutory leave does not break continuity. An employee on maternity leave remains a scheme member and can resume vouchers when they return.
• TUPE transfers preserve membership, provided the new employer continues to offer the scheme.
• Salary changes and promotions do not affect membership, but may change the exempt limit if the employee moves into a different tax band.

The OpRA complication: employer NI savings

This is where many employers get caught out. The Optional Remuneration Arrangements (OpRA) rules, introduced in April 2017, changed the tax treatment of benefits provided via salary sacrifice. Under OpRA, most salary sacrifice benefits are taxed on the higher of the salary foregone or the cash equivalent of the benefit.

Childcare vouchers were given a temporary exemption from OpRA, but that exemption has now expired for all practical purposes. The critical implication is:

Employer NI savings on childcare vouchers provided via salary sacrifice are not available under OpRA rules.

Under OpRA, the amount foregone (the salary sacrifice) is treated as earnings for NI purposes. This means the employer still pays NI on the sacrificed amount as if the salary sacrifice had not taken place. The employee income tax and NI exemption still applies (up to the exempt limits), but the employer NI saving does not.

This catches out a surprising number of employers who still include childcare voucher NI savings in their benefits business cases. If your payroll is set up correctly, you should already be paying employer NI on the sacrificed amount — but it is worth auditing this to be sure.

What employees actually save

Despite the loss of employer NI savings, childcare vouchers remain valuable for employees who are still in a legacy scheme. A basic rate taxpayer sacrificing the full £2,860 per year saves:

• Income tax: £2,860 × 20% = £572
• Employee NI: £2,860 × 8% = £228.80
• Total annual saving: £800.80

For a higher rate taxpayer (limited to £1,456):

• Income tax: £1,456 × 40% = £582.40
• Employee NI: £1,456 × 2% = £29.12 (assuming earnings above the upper earnings limit)
• Total annual saving: £611.52

These are meaningful savings, particularly for basic rate taxpayers, and explain why many employees choose to remain in legacy schemes rather than switching to Tax-Free Childcare.

Tax-Free Childcare: the government alternative

Tax-Free Childcare (TFC) is a government scheme open to all qualifying parents. For every £8 a parent pays into a childcare account, the government adds £2 — effectively a 20% top-up on childcare costs, capped at £2,000 per child per year (or £4,000 for disabled children).

When is TFC better than vouchers?

TFC is generally more favourable when:

• The employee is a higher or additional rate taxpayer (the voucher exempt amount is reduced, while TFC provides 20% regardless of tax band)
• The employee has high childcare costs (TFC provides up to £2,000 per child; vouchers are capped at £2,860 total regardless of number of children)
• The employee has more than one child in qualifying childcare
• The employee has recently joined the employer (they cannot access vouchers)

Vouchers are generally better for basic rate taxpayers with one child, where the combined income tax and NI saving exceeds the 20% TFC top-up.

Important: you cannot use both simultaneously

An employee cannot receive childcare vouchers and Tax-Free Childcare at the same time. If they open a TFC account, they must leave the voucher scheme — and as noted above, they cannot rejoin.

Employers should ensure employees understand this before making the switch. A well-intentioned benefits communication that encourages everyone to “check out Tax-Free Childcare” could inadvertently cause employees to leave a scheme that was better for them.

Employer responsibilities for legacy schemes

If you still operate a childcare voucher scheme, your obligations include:

1. Maintaining the scheme for existing members

You cannot unilaterally close the scheme or force members to leave. Existing members have a contractual right to continue receiving vouchers as part of their employment terms. Removing this benefit would likely constitute a change to terms and conditions requiring consultation.

2. Correct payroll treatment

Ensure your payroll applies the correct exempt limits based on each employee’s tax band. The basic qualifying test should be run at the point of joining and annually thereafter. Apply employer NI correctly under OpRA rules.

3. Provider management

Most employers use a third-party voucher provider (such as Sodexo, Edenred, or Computershare). These providers handle voucher issuance and provider payments. Ensure your contract remains in place and that you’re not paying excessive fees for a declining member base — it may be worth renegotiating.

4. Communication

Provide clear, balanced information to scheme members about their options. Do not push employees towards TFC without helping them understand the comparison for their personal circumstances.

Modelling childcare within a wider benefits strategy

Even though employer NI savings on childcare vouchers are limited under OpRA, childcare remains an important part of a broader salary sacrifice offering. Employers who combine pension, cycle to work, EV car schemes, and childcare into a single flexible benefits platform see higher overall participation — and the employer NI savings from the other schemes are substantial.

Use our Employer Calculator to model the combined impact of multiple salary sacrifice benefits across your workforce. For a comprehensive overview, see our Salary Sacrifice Calculator guide.

Model your salary sacrifice savings →

Frequently asked questions

Can new employees still join a childcare voucher scheme?

No. Childcare voucher schemes closed to new entrants on 4 October 2018. Only employees who were members of a scheme on or before that date can continue to receive vouchers. New employees should be directed to Tax-Free Childcare as an alternative.

Do employers save NI on childcare vouchers?

Generally not, under current OpRA rules. The Optional Remuneration Arrangements legislation means that for most salary sacrifice benefits introduced after April 2017, including childcare vouchers for practical purposes, the salary foregone is still treated as earnings for employer NI. The employee income tax and NI exemption on vouchers still applies up to the exempt limits, but the employer NI saving does not.

Should I advise employees to switch from vouchers to Tax-Free Childcare?

It depends on the employee’s circumstances. Basic rate taxpayers with one child in childcare are often better off staying with vouchers, as the combined income tax and NI saving can exceed the 20% TFC top-up. Higher rate taxpayers and those with multiple children may benefit from TFC. Provide balanced information and encourage employees to use a comparison tool before making an irreversible decision.

What happens to voucher membership during maternity leave?

Maternity leave, and other forms of statutory leave, does not break scheme continuity. The employee remains a member throughout their leave and can resume receiving vouchers when they return. During paid maternity leave, the employer should continue to provide the non-cash benefit (vouchers) as part of the employee’s remuneration package, although the salary sacrifice element may be adjusted.

Can an employer close its childcare voucher scheme?

This is a contractual matter. If childcare vouchers form part of the employee’s terms and conditions, removing them would require proper consultation and agreement. Employers cannot unilaterally withdraw the benefit from existing members. Seek legal advice before considering scheme closure, and be aware of the reputational impact among affected employees.