With childcare costs rising, many employers are offering a nursery for employees’ children as a valuable benefit. When set up correctly, this can be a tax-free benefit and helps employers attract and keep staff. Larger companies might provide an on-site nursery, while smaller ones often partner with local nursery providers.
To qualify for tax exemption, there are two main requirements for these partnerships:
- Financing Responsibility: Employers must actively contribute to the cost of childcare. This means committing to fund a portion of the total costs and covering any losses. Simply paying a set amount per employee’s child is usually not enough to meet this requirement.
- Management Responsibility: Employers need to be actively involved in managing the childcare provision, for example participating in hiring and overseeing nursery staff and allocating places. If an employer only provides occasional advice or input, this may not be sufficient. If an employer has a representative on the nursery’s management board, there must be proof that they are actively involved in running the nursery.
HMRC have recently been checking these arrangements to ensure they meet the criteria for tax exemption. They have found that some schemes, promoted by intermediaries, encourage employers to offer childcare benefits through salary-sacrifice arrangements. These schemes often handle all the details, leaving the employer with minimal involvement, which could lead to failing the tax exemption requirements.
For self-employed individuals or those whose employers do not offer nursery facilities, setting up a government tax-free childcare account is an alternative option.
If you’re concerned about whether your childcare arrangements meet the tax exemption conditions, please contact us.