I am currently receiving tax credits from the Government. How will these be affected by the salary sacrifice scheme?

A salary sacrifice scheme can affect tax credit entitlement. Parents are strongly advised to find out to what extent any tax credits they receive will be affected before they commit themselves to receiving childcare vouchers through a salary sacrifice scheme.

In April 2003 the Government introduced Working Tax Credit (WTC) and Child Tax Credit (CTC) to help working families on low to middle incomes. WTC also has a childcare element to it – the childcare tax credit - that enables families to receive support for eligible (i.e. registered) childcare. The amount of WTC a family receives is dependent on several factors, including the number of hours worked, the level of earnings received, how many children are in the family and the amount of eligible childcare costs.

Working Tax Credit is calculated on actual taxable earnings, so if these are reduced via a salary sacrifice scheme an individual’s WTC entitlement might increase.

However, if an individual has childcare costs that are eligible for the childcare element of the Working Tax Credit and chooses to receive childcare vouchers through a salary sacrifice scheme, the amount of their childcare costs that are then eligible for the childcare element of WTC will be reduced by the amount that is covered by the voucher.

Therefore, in some instances, parents might be better off receiving support for their childcare costs through WTC rather than through childcare vouchers.