What is ‘salary sacrifice’ for child care?

Salary sacrifice is a scheme that allows an employee to give up the right to receive part of their cash-pay due under her or his contract of employment in return for the employer’s agreement to provide the employee with some form of non-cash benefit.

Under the terms of the Employer Supported Childcare Vouchers scheme, an individual will sacrifice their cash-pay (taxable salary) in return for childcare vouchers, which are exempt from National Insurance Contributions (NICs). This will mean that the employee will retain their NICs and tax and can therefore receive more vouchers that the cash they would have received through the taxable salary they would have received at no extra cost to their employer. However, it also means that the amount of earnings on which NICs is paid, is reduced; and it may take an individual’s earnings below the Lower Earnings Limit (LEL), which can have long-term implications that are discussed later.

Salary sacrifice schemes are offered to employees on a range of benefits such as computers, bicycles, mobile phones and childcare. The Inland Revenue oversees salary sacrifice schemes because they operate under tax law rather than employment law.