How does Employer Supported Childcare work?

Updated on 24 November 2017

This page explains how childcare vouchers, the most common type of Employer Supported Childcare (ESC), work.

What are childcare vouchers?

Your employer can provide childcare vouchers in two ways:

  1. You can receive childcare vouchers on top of your normal pay.
  2. Your employer may ask you to give up part of your pay to buy the childcare vouchers. This is called a salary sacrifice arrangement.

Your employer will normally use a childcare voucher company who will provide you with either paper vouchers or an online account with electronic vouchers. You use these vouchers to pay your childcare provider.

You can spend the childcare vouchers as you get them or you can save them up. For example if you are on maternity leave, you can continue to buy vouchers to use when you return to work.

What are the benefits of childcare vouchers?

You do not pay tax and National Insurance on the value of the vouchers up to certain limits. If you receive vouchers worth more than set limits, you will pay tax and National Insurance on the extra amount.

The benefit for your employer is that they will save employer National Insurance contributions.

What is directly-contracted childcare?

Directly-contracted childcare is where your employer sets up an arrangement with a childcare provider on behalf of the employees and pays the costs directly. If your employer offers directly-contracted childcare on top of your normal pay, there is no income tax or National Insurance to pay on the benefit if its value is within a set limit and certain other conditions are met. Your employer will save the Class 1A National Insurance that they would normally pay on provision of a benefit. Where the benefit exceeds the limit, income tax and National Insurance are payable on the excess

The rest of this section covers childcare vouchers, but the rules described below also apply to directly contracted childcare. 

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