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Childcare vouchers – still a win/win?

Posted on Mar 24, 2016 in All posts

One of the most popular employee benefits for working parents and parents to be –  childcare vouchers are often seen as a classic win/win for employers and employees alike.  Employers can make a National Insurance saving and employees get to take up to £243 per month (depending on their tax bracket) from their gross salary to pay towards childcare.

So far, so good, but what happens when an employee goes on maternity leave?  Childcare vouchers are often provided through a salary sacrifice scheme, where the employee agrees to “sacrifice” part of their gross salary in exchange for childcare vouchers to the same amount.

The established view, and HMRC’s own guidance, suggested that childcare vouchers are a benefit (and therefore should be continued during maternity leave, where all benefits of employment other than wages or salary, must continue).

In practice, this meant a windfall for an employee on maternity leave once they had exhausted their entitlement (if any) to company maternity pay as they could get their vouchers without having to give up the corresponding amount from their salary.

In Peninsula Business Services Ltd v Donaldson UKEAT/0249/15 the EAT rejected the established view and characterised the HMRC guidance as “some unknown official’s interpretation of [the legislation], supposedly in clear if cosy, and therefore perhaps over-simplistic, language, which is not a proper basis for decision making in the courts”.  In the EAT’s view, “salary sacrifice” was actually a diversion of salary and therefore not a benefit which must continue to be provided during maternity leave.

As part of its reasoning, the EAT emphasised that continued provision of vouchers produces a windfall benefit for the employee and a cost on the employer (whether that is actually true for a particular employer will depend on its size and overall national insurance bill, but it is certainly more likely to be true for small and medium businesses).

What appears to have been missed though, is that by ruling that childcare vouchers do not need to continue, the decision goes beyond preventing an employee windfall and can actually lead to a windfall to the employer funded by reduced company maternity pay which is calculated by reference to the employee’s salary after it has been reduced by their salary sacrifice to fund vouchers.

Are childcare vouchers still a win/win?  In most cases, yes but a careful review of the maths to double check that it works for you has become even more important.