What is salary sacrifice and how does it work?

Salary Sacrifice involves the employee agreeing to formally give up some of their existing taxable salary, in return for a non-cash benefit. Your employees must sign a salary sacrifice contract to vary the terms of their employment. The earnings they exchange for childcare vouchers are gross, so there is no tax or NI to pay.

The amounts that your employees can take in childcare vouchers without paying tax and NI depends on their earnings. You will need to complete a Basic Earnings Assessment for each new joiner to the scheme. The Basic Earnings Assessment calculates the employee’s tax band which dictates the maximum entitlement to childcare vouchers.

This requirement came into force in April 2011 and doesn’t apply to any employee that was already in the scheme at that date. Each April all new joiners since April 2011 need to be re-assessed.

Please see below the eligibility brackets for 2021/22

*Total earnings include salary, other taxable benefits, and allowance.