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Reduce Childcare Costs

Benefit from Salary Sacrifice and a Reduced Tax Bill

Jan 20, 2009 Asa Ghaffar

Salary sacrifice can cover childcare costs and reduce a tax bill. The childcare voucher scheme allows a parent to sacrifice salary in return for a non-cash benefit.

Escalating childcare costs have made it increasingly difficult for many parents to work. The government stepped in and introduced the childcare voucher scheme to boost the number of working parents. Used in conjunction with salary sacrifice, it allows a parent to benefit from a lower tax bill.

What is Salary Sacrifice?

Salary sacrifice involves an employee arranging a slight variation in their employment contract to give up a portion of their salary for a non-cash benefit. The most common example of this is pension contributions, but there are several other viable options, including childcare costs.

What Does the Childcare Voucher Scheme Entitle a Parent to?

Many parents aren't aware that salary sacrifice can be used to cover childcare costs under the childcare voucher scheme. Since parents will only pay tax and national insurance on their new lower salary, this means that they will benefit from a reduced tax bill.

The childcare voucher scheme entitles an employee to get childcare vouchers worth up to £55 per week or £243 per month. The vouchers can be used to fully or partially cover childcare costs. In order to qualify, the childcare voucher scheme can only be used to cover the fees of a registered childminder.

How Much Could Salary Sacrifice and the Childcare Voucher Scheme Save Parents?

Salary sacrifice will financially benefit all tax payers via a lower national insurance and tax bill, but higher-rate tax payers clearly stand to gain most. A standard-rate tax payer could save up to £960 and a higher-rate tax payer could save about £1200 per annum.

Are there any Negatives in Relation to Salary Sacrifice?

A salary sacrifice means foregoing a portion of one's salary for a lower tax bill. Whilst this makes a great deal of sense, it can mean lower maternity benefits. It also creates issues for those seeking to get a mortgage as most borrowers can only get 3.5 times salary.

Salary sacrifice is an excellent option, especially by those paying higher-rate tax. Whilst it does reduce take-home pay, tax payers will be better off in real terms. Those working for a struggling company, planning a family or about to apply for a mortgage should seek advice before proceeding.

Those that are interested in tax-free savings may also wish to read about the stocks and shares ISA or cash ISA. Investors with an existing ISA may want to find out how to transfer an ISA to get a better rate of interest on their savings.

The copyright of the article Reduce Childcare Costs in Personal Budgeting/Finance is owned by Asa Ghaffar. Permission to republish Reduce Childcare Costs in print or online must be granted by the author in writing.