Workplaces across the UK are being urged this week to do more to support employees with children. The push reflects a genuine pressure point. Full-time nursery costs in the UK now average over £14,000 per year, and in London they frequently exceed that. For many working parents, childcare is the largest single household cost after rent or mortgage. It is also one of the most common reasons people, particularly women, reduce their working hours or leave the workforce altogether.
For employers, the business case for supporting working parents is straightforward: retention, recruitment, and productivity. For employees, the financial pressure is real and growing.
But what can you actually do? And what does the tax system allow, specifically for smaller businesses that do not have an HR department or a benefits team?
This guide covers the practical options available to employers in 2026, the tax treatment of each, and what this means both for you as a business owner and for your employees.
Tax-Free Childcare – What Employers Should Know
Tax-Free Childcare (TFC) is the Government’s main childcare support scheme. It is not an employer-run benefit. Employees set it up themselves through a Government childcare account online. But employers can and should tell their employees about it, and some employers choose to contribute to their employees’ TFC accounts as an added benefit.
How it works:
For every £8 an employee pays into their childcare account, the Government adds £2. The maximum Government contribution is £2,000 per child per year (or £4,000 for a disabled child). The funds can be used to pay registered childminders, nurseries, nannies, and after-school clubs.
Who qualifies:
Both parents must be working and earning at least the equivalent of 16 hours at the National Living Wage per week (approximately £152 per week). Neither parent can earn more than £100,000 per year. If either parent earns above £100,000, eligibility is lost.
Employer NI note for high earners: If any of your employees earns close to £100,000, a salary sacrifice pension arrangement could reduce their adjusted net income below that threshold and restore their Tax-Free Childcare eligibility. This is worth mentioning to affected staff and is a meaningful additional benefit at no direct cost to the employer.
Can employers contribute directly? Yes. An employer can make contributions to an employee’s TFC account as part of their benefits package. However, these contributions must come from the employee’s net pay (after tax), not gross pay. This is important. If you deduct money from gross pay to fund TFC, you are essentially running an unlawful arrangement. The contribution has to come from take-home pay.
The Workplace Nursery Scheme — The Most Generous Childcare Benefit Available
The Workplace Nursery Scheme is the most tax-efficient childcare support available to employed parents, and it is dramatically underused.
Under this scheme, an employer enters into a qualifying arrangement with a registered nursery. Employees then sacrifice part of their gross salary in exchange for having their nursery fees paid directly by the employer. Because the sacrifice comes out of gross pay, there is no income tax and no NI on the sacrificed amount.
The savings are substantial:
For a basic rate taxpayer sacrificing £1,500 per month for nursery fees:
- Tax and NI savings: approximately £480 per month
- Net cost of a £1,500 nursery bill: approximately £1,020 per month
- Annual saving: approximately £5,760
For a higher rate taxpayer:
- Tax and NI savings: approximately £660 per month
- Net cost of a £1,500 nursery bill: approximately £840 per month
- Annual saving: approximately £7,920
Employers also save 15% employer NI on the sacrificed amount. An employee sacrificing £18,000 per year in nursery fees saves the employer £2,700 in NI. This makes the scheme effectively cost-neutral or better for the business.
Important requirements: The employer must enter into a genuine partnership arrangement with the nursery provider. The nursery must be Ofsted registered. The arrangement must meet HMRC’s rules under Section 318 of ITEPA 2003. Several specialist providers help employers set this up, and the admin cost is usually small.
Note: employees cannot use Tax-Free Childcare and the Workplace Nursery Scheme simultaneously for the same child.
Salary Sacrifice for Pension – How It Supports Working Parents Indirectly
Beyond childcare specifically, salary sacrifice for pension contributions is one of the most useful tools for employees at all income levels.
For a working parent earning £100,000 or just above it, pension salary sacrifice can:
- Reduce adjusted net income below £100,000, restoring the full Personal Allowance
- Restore eligibility for Tax-Free Childcare (worth up to £2,000 per child per year)
- Restore eligibility for 30 hours of free childcare for 3 and 4 year olds
- Avoid the 60% effective tax rate in the £100,000 to £125,140 taper zone
The combined value of these restorations can be £5,000 or more per year for a single-child household. For an employee with two children, it can be significantly higher.
For employees earning below £100,000, salary sacrifice for pension still reduces employer NI on the sacrificed amount. Many employers pass that NI saving back to the employee as an additional pension contribution. If your business does not currently do this, it is worth considering.
What Employers Can Offer That Is Tax-Free
Some family-friendly benefits are completely exempt from income tax and NI if structured correctly:
Childcare payments up to £55 per week (legacy vouchers): If your business joined a childcare voucher scheme before October 2018 and you still have eligible employees in it, those vouchers of up to £55 per week (basic rate employees) remain tax and NI free. This scheme is closed to new entrants.
Employer-provided workplace nurseries: If you run a nursery on your premises or have a genuine partnership with a commercial nursery, the cost to employees of that care is entirely exempt from tax and NI with no cap. This is not available to all businesses, but for larger employers it is a significant benefit.
Flexible working arrangements: While not a financial benefit, offering flexible working hours or hybrid arrangements has a direct financial value for parents who can reduce childcare hours needed. There are no tax implications for either employer or employee.
Parental leave pay: Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), and Statutory Shared Parental Pay are all deductible as employment costs for the business. Small employers (with annual NI bills under £45,000) can reclaim 103% of SMP from HMRC, meaning the Government pays the SMP plus a 3% top-up.
The Employer NI Picture for 2026/27
Supporting working parents often involves keeping employees who might otherwise leave to reduce childcare costs. Given the employer NI changes that came into force in April 2025 (the rate rising to 15% and the secondary threshold dropping to £5,000), retaining experienced employees has become more expensive.
But the cost of replacing a leaver who exits due to childcare pressure is typically 6 to 9 months of their salary when you factor in recruitment, onboarding, and lost productivity. Offering a modest childcare support benefit, even one structured purely as information and signposting about Tax-Free Childcare, costs nothing and can be the difference between a good employee staying or going.
A Real-Life Example
Client C ran a digital marketing agency in North West London with 12 employees. Three of his best people were either on maternity leave or had recently returned to part-time hours after having children. None of the three knew about Tax-Free Childcare or the Workplace Nursery Scheme.
We reviewed his team’s situation and wrote a short benefits summary that he shared with all staff. Two of the three employees then set up Tax-Free Childcare accounts, saving them £2,000 per year each. One employee, who was paying £1,400 per month in nursery fees, qualified for the Workplace Nursery Scheme through a provider Client C arranged. Her net nursery cost dropped from £1,400 to approximately £860 per month.
The total employer cost to Client C was the arrangement fee for the Workplace Nursery Scheme, approximately £400 per year. His NI saving from the salary sacrifice was approximately £2,520 per year. He came out ahead financially and retained an employee who had been seriously considering not returning from maternity leave at all.
Frequently Asked Questions
Do I have to offer childcare support as an employer? No, it is not legally required for most employers. But the tax efficiency of schemes like the Workplace Nursery Scheme means that offering them can actually reduce your employer NI bill, making them cost-neutral or better.
My business is very small, can I still offer salary sacrifice? Yes. Salary sacrifice is available to businesses of any size. You need a written agreement with each employee and to update your payroll. There is no minimum number of employees.
What if an employee earns below the National Minimum Wage after the sacrifice? You cannot allow a sacrifice arrangement that takes an employee’s pay below the National Living Wage (£12.21 per hour for those 21 and over in 2026/27). If the sacrifice would breach this, it cannot proceed.
Is childcare support deductible for Corporation Tax? Yes. Any employer contributions to employee childcare arrangements, payments for workplace nursery schemes, and the employer NI savings from salary sacrifice all flow through your accounts as legitimate employment costs deductible against Corporation Tax.
Working parents are an enormous part of the UK workforce, and supporting them through the tax-efficient options available is one of the smartest things a small employer can do in 2026. The cost is often far lower than people assume, and the retention value is significant.
At Your Tax Help Accountants in Stanmore, we advise small and medium-sized businesses across Harrow, Wembley, and London on employment tax, payroll, and salary sacrifice structures.
Call Talha on 07478 645331, email info@yourtaxhelp.co.uk, or visit yourtaxhelp.co.uk.
Book your free 15-minute call: calendly.com/yourtaxhelp/15min
General guidance only. Not personal tax advice. Figures are for 2026/27.
