Salary Sacrifice on Nursery Fees: How the Workplace Nursery Route Works (2026/27)

TL;DR: Salary sacrifice on nursery fees lets you pay a registered nursery from pre-tax pay through your employer, under the Section 318 workplace nursery exemption. There is no £55 cap, and depending on your tax band you save roughly 28% to 47% of the fees. The catch most pages skip: you cannot also claim Tax-Free Childcare for the same child.

If you have heard you can pay nursery fees before tax, this is the route people mean. It sits in Section 318 ITEPA 2003, the workplace nursery exemption. Done properly, the sacrificed pay is exempt from income tax and employee National Insurance, with no monetary cap. This post explains how it works, what you could realistically save in 2026/27, and exactly when Tax-Free Childcare beats it.

What "salary sacrifice on nursery fees" actually means

Salary sacrifice means you formally agree to give up part of your gross salary. In return your employer pays a registered nursery directly on your behalf. Because the workplace nursery exemption applies, that slice of pay is never taxed, so your fees come out of pre-tax income rather than what is left after tax and National Insurance.

At a glance:

• You sacrifice salary equal to your nursery cost; your employer pays the nursery.
• The sacrificed pay is exempt from income tax and employee National Insurance under Section 318.
• There is no £55 cap and no means test — eligibility is broad.
• You cannot also use Tax-Free Childcare for the same child at the same time.
• Your employer must genuinely help finance and manage the provision for the exemption to hold.

How the workplace-nursery route works (the Section 318 mechanism)

The exemption sits at Section 318 ITEPA 2003. Where the qualifying conditions are met, the benefit is exempt from income tax and Class 1A National Insurance with no monetary cap. That is the key difference from the old childcare vouchers, which were capped and are now closed.

The conditions are what make it real. The child must be a qualifying child the employee has parental responsibility for; the nursery must be registered and not a private dwelling; the benefit must be open to employees generally; and the employer must be wholly or partly responsible for financing and managing the provision. That last condition is the one that separates a genuine arrangement from a marketed scheme. We cover it in full on our Section 318 page.

Who's eligible — employees and children

Eligibility is broad and not means-tested. Any employee paying tax through PAYE can use a qualifying arrangement, provided the sacrifice does not take their pay below the National Minimum or National Living Wage, and the child is a qualifying child they have parental responsibility for. The benefit must be open to the employer's employees generally, so it is not a perk reserved for senior staff.

What a family could save (worked examples + disclaimer)

Because the fees come off the top of your taxable pay, the percentage you save equals your marginal income-tax rate plus your National Insurance rate on that slice. In 2026/27 in England, Wales and Northern Ireland that is broadly:

Scottish income-tax bands differ, so the saving for a Scottish taxpayer is calculated band by band and is often larger. We work that through in Workplace nursery savings in Scotland. To estimate your own number, use the Halo calculator.

This is not tax advice. Actual savings depend on your circumstances, employer participation, and nursery costs.

Salary sacrifice vs Tax-Free Childcare: which is better for you?

This is the part most pages bury. Tax-Free Childcare tops up what you pay by 20%, capped at £500 a quarter, or £2,000 per child a year (£4,000 if the child is disabled). The workplace nursery route has no government cap, so for higher fees, higher earners, or more than one child it can save materially more than the £2,000 ceiling.

You cannot run both against the same child's fees in the same tax year — it is one or the other, so compare. As a rough guide, Tax-Free Childcare tends to suit lower fees and basic-rate households near the £2,000 cap, while the workplace nursery exemption tends to win for higher fees and higher tax bands. The full comparison, with the numbers, is in Tax-Free Childcare vs the workplace nursery benefit.

Why this isn't childcare vouchers (and why the £55 cap doesn't apply)

The £55 a week limit belongs to the old childcare voucher scheme under Section 318A, which closed to new entrants on 4 October 2018. The Section 318 workplace nursery exemption is a different, uncapped relief that did not close. If a page tells you nursery salary sacrifice is capped at £55 a week, it has confused the two.

How an employer sets it up properly — the partnership conditions that matter

The exemption only holds where the employer accepts genuine material financial responsibility for, and a role in managing, the provision. HMRC has been clear that it does not apply to commercially marketed schemes where an employer simply buys places at a nursery with no real involvement. An extra fixed payment alone does not meet the financing test, and appointing a scheme promoter as the employer's agent does not meet the management test.

In plain terms: a compliant arrangement is one the employer genuinely runs and can evidence, not one it outsources wholesale to a promoter. That distinction is the whole game, and it is why we treat compliance as the product, not an afterthought.

How to offer it with Halo

Halo is compliance software that lets an employer run its own workplace nursery programme and hold the evidence that the Section 318 conditions are met. It is not a scheme, a marketplace, or a savings product, and we make no claim that HMRC approves or endorses any arrangement — HMRC does not do that. What Halo does is make a genuine arrangement manageable and documented for an employer of any size. Employers can start at Halo for employers; parents can find a registered nursery.

FAQ

What is salary sacrifice on nursery fees?

You agree to give up part of your salary equal to your nursery cost, and your employer pays the registered nursery directly. Under the Section 318 workplace nursery exemption the sacrificed pay is exempt from income tax and employee National Insurance, so you pay nursery fees from pre-tax income.

How much can I save?

It depends on your tax band and fees, broadly 28% (basic rate) to 47% (additional rate) of the amount you sacrifice in 2026/27. A family with £1,200 a month in fees might save in the region of £4,000 (basic rate) to £6,800 (additional rate) a year. Figures are illustrative. This is not tax advice. Actual savings depend on your circumstances, employer participation, and nursery costs. Try the calculator for your own number.

Can I use this and Tax-Free Childcare?

Not for the same child's fees at the same time. You choose whichever saves you more, and most families can still use their 15 or 30 funded hours alongside it. Check your own position with HMRC.

Who is eligible?

Any employee paying tax through PAYE whose employer offers a qualifying arrangement, as long as the sacrifice does not drop their pay below the National Minimum or Living Wage and the benefit is open to staff generally. It is not means-tested.

Is there a cap like childcare vouchers?

No. The £55 a week cap applied to the old childcare voucher scheme, which closed to new entrants on 4 October 2018. The Section 318 workplace nursery exemption has no statutory monetary cap.

Does my employer have to run an on-site nursery?

No. An employer can partner with a registered nursery, but it must genuinely share responsibility for financing and managing the provision. That is the condition that keeps the exemption valid. Halo is software that helps an employer run and evidence its own programme so those conditions are met.

This is not tax advice. Actual savings depend on your circumstances, employer participation, and nursery costs.