Workplace Nursery Benefit

A workplace nursery is one of the most valuable tax-free employee benefits available in the UK. Unlike most childcare support, there is no cap on the value of the exemption — the full cost of the nursery place is free from income tax and National Insurance for both the employer and the employee. This makes it significantly more generous than childcare vouchers or Tax-Free Childcare.

How the Exemption Works

The workplace nursery exemption is set out in ITEPA 2003, section 318. When an employer provides qualifying childcare, the entire value is exempt from:

• Income tax on the employee
• Employee National Insurance contributions
• Employer Class 1A NICs

There is no need to report the benefit on a P11D because it is fully exempt.

Value of the Tax Saving

The tax saving depends on the cost of the nursery place and the employee’s marginal tax rate:

The tax saving figures include both income tax and the employee’s NIC saving (at 8% for basic rate).

Qualifying Conditions

For the exemption to apply, the childcare must meet all of the following conditions:

The Premises

The nursery must be provided on premises that are not used wholly or mainly as a private dwelling and fall into one of these categories:

• Employer’s own premises — the most straightforward option
• Premises managed by the employer jointly with other employers — a shared nursery arrangement
• Premises provided under arrangements made by the employer — where the employer has contracted with a nursery provider and the nursery is made available wholly or partly for the employer’s employees

The Childcare

• The childcare must be registered or approved under the relevant legislation (the Childcare Act 2006 in England, or equivalent in Scotland, Wales and Northern Ireland)
• The child must be a child or stepchild of the employee, or a child for whom the employee has parental responsibility
• The child must be of qualifying age (generally under compulsory school age, though some nurseries accept older children during school holidays)

The Funding

The employer must fund or part-fund the nursery places. This can be through:

• Direct provision — the employer runs the nursery itself
• Partnership — the employer partners with other employers to operate a shared nursery
• Contract — the employer contracts with an external nursery provider and secures reserved places

The key requirement is that the employer has a genuine financial involvement in the provision of the nursery. Simply giving an employee money to pay nursery fees elsewhere does not qualify.

Workplace Nursery vs Other Childcare Benefits

The workplace nursery stands out because the exemption has no monetary limit, making it particularly attractive for employees in areas with high childcare costs.

Combining with Other Benefits

Employees can use the workplace nursery benefit alongside other employee benefits without restriction. They can also use Tax-Free Childcare for any additional childcare costs not covered by the workplace nursery (for example, a childminder for hours outside the nursery’s operating times).

Employees still enrolled in the childcare voucher scheme (closed to new entrants) can use vouchers alongside a workplace nursery place, but they cannot claim Tax-Free Childcare at the same time as childcare vouchers.

Salary Sacrifice for Nursery Places

Employers can offer workplace nursery places through a salary sacrifice arrangement. Because the workplace nursery exemption is an approved benefit, the full NIC and income tax advantage applies under salary sacrifice, unlike most other benefits affected by the Optional Remuneration Arrangements rules.

The employee’s gross salary is reduced by the cost of the nursery place, and both parties save on NICs. The post-sacrifice salary must not fall below the National Minimum Wage.

Employer Considerations

Cost and Feasibility

Setting up a workplace nursery involves significant investment:

• Space — suitable premises that meet Ofsted (or equivalent) registration requirements
• Staffing — qualified early years practitioners at the required ratios
• Registration — the nursery must be registered with the relevant childcare regulator
• Ongoing costs — maintenance, insurance, consumables, regulatory compliance

Many employers find that a partnership model — contracting with a specialist nursery provider to operate on or near the employer’s premises — is more practical than running a nursery in-house.

Demand Assessment

Before committing, employers should survey their workforce to gauge demand. A nursery typically needs a minimum number of places to be financially viable. Employers with fewer than 100 employees may find it difficult to sustain a dedicated nursery, though a shared arrangement with neighbouring employers can work.

Accounting Treatment

The cost of providing or subsidising a workplace nursery is a deductible business expense for corporation tax. The employer records the cost as an employee benefit expense. Because the benefit is exempt from Class 1A NICs, there is no additional NIC cost to report on the P11D(b).

Record-Keeping

Although the benefit is exempt from P11D reporting, the employer should retain evidence that the qualifying conditions are met:

• Nursery registration certificate from Ofsted or the relevant regulator
• Contractual arrangements with the nursery provider (if externally operated)
• Records of which employees receive nursery places
• Evidence of the employer’s financial contribution to the nursery provision