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:
| Annual Nursery Cost | Basic Rate Taxpayer | Higher Rate Taxpayer | Additional Rate Taxpayer |
|---|---|---|---|
| £10,000 | £2,800 | £4,200 | £4,700 |
| £15,000 | £4,200 | £6,300 | £7,050 |
| £20,000 | £5,600 | £8,400 | £9,400 |
The figures combine income tax at 20%, 40% or 45% with an illustrative employee NIC saving of 8% for a basic rate taxpayer and 2% above the Upper Earnings Limit. The actual NIC saving depends on the rates for the tax year.
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
| Benefit | Tax-Free Limit | NIC Saving | Still Open to New Entrants |
|---|---|---|---|
| Workplace nursery | Unlimited | Yes | Yes |
| Tax-Free Childcare (government scheme) | £2,000/year per child (£4,000 if disabled) | N/A (not employer-provided) | Yes |
| Childcare vouchers | £55/week (basic rate) | Yes | No — closed since October 2018 |
| Employer-contracted childcare (off-site, not meeting premises test) | Taxable as BIK | No | N/A |
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