What Taxes Apply To Childcare Vouchers?

The IRS Tax Tip 2024-58 highlights the employer-provided Childcare Tax Credit as an incentive for businesses to provide childcare services to their employees. This tax credit helps employers cover some costs for childcare resources and can offset 25 of qualified childcare facility expenditures and 10 of eligible children and other dependents. Parents can reduce their tax burden by claiming childcare expenses, such as the Child and Dependent Care Tax Credit. Employers that supply child care subsidies can take advantage of an annual tax credit of up to $150,000 if they use it for childcare.

To claim tax credits, employees need to meet certain requirements and file a tax return, even if they have no other filing requirements or owe no tax. They do not pay tax and National Insurance on the value of the vouchers up to certain limits. If you receive vouchers worth more than set limits, you will pay tax and National Insurance.

Refunding childcare vouchers requires deducting PAYE tax and National Insurance contributions before making the refund to employees. Employees can exchange part of their pre-tax salary for Childcare Vouchers, which are exempt from tax and National Insurance. Tax-Free Childcare is available to parents with children under 12 (or 17 if disabled), allowing each parent to not pay some income tax and potentially save up to £1,196 of the cost of childcare.

To keep receiving childcare vouchers while on maternity leave, a deduction can be made by way of salary sacrifice from any enhanced maternity pay. Childcare vouchers are tax and National Insurance exempt to certain limits depending on the rate of tax and NI paid.