A place in a qualifying workplace nursery is free of tax and National Insurance with no upper limit, and employers can still offer one to new joiners. Childcare vouchers and directly contracted childcare closed to new entrants on 4 October 2018; employees already in a scheme by then can carry on receiving up to £55 a week tax free, or less for higher and additional rate taxpayers who joined after 5 April 2011.

What forms of employer supported childcare are there?

HMRC’s Employment Income Manual at EIM21687 sets out the starting point: if an employer helps with childcare, the help is normally taxable. A cash allowance, paying a nursery’s fees on a contract the employee has made, or reimbursing childcare bills are all earnings under section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), with PAYE and Class 1 National Insurance due, as GOV.UK’s employer guidance on childcare confirms.

Against that, there are three exemptions:

Arrangement ITEPA section Open to new joiners? Limit
Workplace nursery s318 Yes None
Directly contracted childcare s318A No, closed 4 October 2018 £55, £28 or £25 a week
Childcare vouchers s270A No, closed 4 October 2018 £55, £28 or £25 a week

What makes a workplace nursery exempt?

Section 318 gives an unlimited exemption where four conditions, explained at EIM22001 to EIM22005, are met:

Condition A: the child
The child is the employee’s child or stepchild maintained wholly or partly at their expense, lives with the employee, or is a child for whom the employee has parental responsibility. A person is a child until the last day of the week containing the 1 September after their 15th birthday, or 16th if disabled.
Condition B: the premises
Care is not provided on premises used wholly or mainly as a private dwelling, and any registration requirement is met. In England that means Part 3 of the Childcare Act 2006. Care at the employee’s own home, such as a nanny, or at a childminder’s home is not covered.
Condition C: who provides the premises
The premises are made available by the scheme employer alone, or the partnership requirements are met.
Condition D: availability
The scheme is open to the employer’s employees generally, or to all employees at the location where it operates.

The nursery does not need to be at the workplace. GOV.UK says it can be in other premises the employer manages and finances, as long as they are not a private residence. Where the employer provides the premises itself, EIM22004 says the exemption can apply even if it contracts with a commercial nursery business to supply the staff.

Condition D is aimed at nurseries reserved for senior staff. EIM22005 says a scheme limited to directors or senior managers fails, although a waiting list does not, provided places are not allocated in favour of particular groups. A nursery at only one of several sites is fine if it is open to everyone at that site.

Can a small employer use a workplace nursery?

Yes, through the partnership route, which lets small employers join with others to finance and manage a facility. The care must be provided under arrangements made by people who include the scheme employer, on premises made available by one or more of them, and the scheme employer must be wholly or partly responsible for financing and managing the care.

EIM22007 explains that this needs real commitment. Financing means a real and substantial commitment to funding the facility and bearing its risks, not merely buying places at a commercial nursery. Management means close involvement in appointing and monitoring staff, the extent and conditions of care, and the allocation of places. HMRC’s example is a commercial nursery offering places to local employers who take no substantial responsibility for finance or management: that does not qualify. Renting a few places in an ordinary nursery does not turn it into a workplace nursery, and the employer should keep evidence of its funding and management role in case of an employer compliance check.

How do the closed voucher schemes work?

From 4 October 2018, EIM16230 limits the voucher exemption to eligible employees, who must:

  • have been employed by the employer immediately before 4 October 2018 and continue to be;
  • have had at least one qualifying week in a period of 52 tax weeks ending on or after that date; and
  • not have given the employer a childcare account notice saying they want to leave to use Tax Free Childcare.

A transfer under TUPE is treated as the same employment. GOV.UK says an employee can take a break and restart if it is within 52 weeks of stopping, they are still employed by you, and they have not told you they want to leave the scheme. Once an employee tells you they have started using Tax Free Childcare, you must stop giving them vouchers. The same closure applies to directly contracted childcare.

The weekly exempt amount depends on when the employee joined. Those who joined before 6 April 2011 get £55 a week (£243 a month). For later joiners, the employer must carry out a basic earnings assessment at the start of each tax year, and EIM22012 sets the limit by the rate band the estimated earnings fall in:

Rate band Weekly limit Monthly limit
Basic £55 £243
Higher £28 £124
Additional £25 £110

Only one exempt amount is allowed per employee per week however many children there are, though EIM22011 confirms two parents working for employers that each offer a scheme can each receive one. The scheme must have been available to all employees, but EIM22016 allows relevant low paid employees to be excluded where salary sacrifice would take their pay below the National Minimum Wage.

How do salary sacrifice and National Insurance work?

GOV.UK notes that employer supported childcare is normally provided through salary sacrifice. Unlike most benefits, it keeps its tax advantage: HMRC’s salary sacrifice guidance lists workplace nurseries, and childcare vouchers and directly contracted childcare that started on or before 4 October 2018, among the few benefits that do not need to be valued or reported under a salary sacrifice arrangement.

Within the limits there is no tax or National Insurance. Above them, GOV.UK says:

  • excess childcare vouchers are reported on the P11D and Class 1 National Insurance (but not PAYE tax) is deducted on the excess through payroll;
  • excess directly contracted childcare is reported on the P11D with Class 1A National Insurance on the excess;
  • refunds of unused vouchers to current or former employees must have PAYE and National Insurance deducted first.

A worked example

Illustration only. An employee joined her employer’s voucher scheme in 2015 and has stayed in it. Her estimated earnings for 2026 to 2027 put her in the higher rate band, so her limit is £28 a week. She sacrifices £50 a week of salary for vouchers. The first £28 is exempt; the remaining £22 a week goes on her P11D and is subject to Class 1 National Insurance. A colleague who joins the company in 2026 cannot join the voucher scheme but could take a place in the company’s on site nursery with no tax charge at all, or use Tax Free Childcare instead.

Should employees stay in vouchers or switch to Tax Free Childcare?

The two cannot be combined. GOV.UK’s employer guidance requires vouchers to stop once an employee starts Tax Free Childcare, and EIM16230 confirms an employee who leaves to join it loses eligibility for vouchers for good. Tax Free Childcare has its own eligibility and income conditions; see our page on Tax Free Childcare before advising anyone to switch, because the decision cannot be reversed.

What mistakes come up most often?

  • Letting new joiners into a voucher scheme after 4 October 2018.
  • Not repeating the basic earnings assessment each tax year for post 2011 joiners.
  • Treating bought in places at a commercial nursery as a workplace nursery.
  • Paying a nanny or childminder and assuming the workplace nursery exemption applies.
  • Refunding unused vouchers without deducting PAYE and National Insurance.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.