UK Workplace Nursery Scheme 2026: Tax-Free Childcare Through Your Employer

A workplace nursery scheme is one of the most tax-efficient childcare benefits an employer can offer -- and it is often overlooked because it is confused with the old childcare voucher scheme or salary sacrifice arrangements. When set up correctly, the childcare benefit is completely free of income tax and National Insurance for employees, with no monetary cap on the value of the benefit. Here is how it works in 2026.

What Is a Workplace Nursery Scheme?

A workplace nursery exemption allows an employer to fund childcare places at a nursery without the employee paying tax on the benefit. The key conditions are:

1. The employer must be a partner or participant in the nursery -- not just paying fees on behalf of the employee.
2. The nursery must be available to all employees (or a defined group on non-discriminatory grounds).
3. The childcare must be for a child who is a dependant of the employee.
4. The nursery must be registered with the relevant care inspectorate (Ofsted in England, Care Inspectorate in Scotland, Estyn in Wales, RQIA in Northern Ireland).

When these conditions are met, there is no Benefit in Kind (BIK) charge on the employee. The employer pays for childcare places and those payments do not appear on the employee's P11D. There is no annual cap -- unlike the old childcare voucher scheme, a workplace nursery exemption can cover the full cost of childcare, however high it is.

How Does Employer Participation Work?

This is where many arrangements go wrong. The employer cannot simply pay an employee's nursery fees directly -- that would be a taxable BIK. Instead, the employer must enter a contractual arrangement with the nursery provider that makes the employer a genuine partner in the provision of childcare.

In practice this usually involves one of the following structures:

On-site nursery: The employer operates or contracts with a nursery provider to run a nursery on the employer's premises. This is the traditional model -- large employers with enough staff to fill places run nurseries on site.

Off-site employer-contracted nursery: The employer contracts directly with a registered childcare provider to reserve a block of places. The contract must be between the employer and the nursery, with the employer paying for the reserved places regardless of whether they are used. The employer then allocates those places to employees. HMRC scrutinises these arrangements carefully -- the employer must have a genuine commercial relationship with the nursery, not simply act as a conduit for paying employee fees.

Consortium or shared arrangements: A group of smaller employers can join a consortium to collectively fund a shared nursery. This allows smaller businesses, which alone could not fill a nursery, to participate in the scheme.

How Does It Differ from Childcare Vouchers?

The employer-supported childcare voucher scheme closed to new entrants in October 2018. Employees who were already enrolled before that date and have remained continuously employed can continue using vouchers up to GBP 243 per month (basic rate taxpayer) -- these are NI and tax-exempt within that cap.

The key differences are:

If your employer cannot offer a workplace nursery arrangement, existing voucher holders should retain their entitlement wherever possible.

Salary Sacrifice and Workplace Nurseries

Salary sacrifice (or salary exchange) is sometimes used alongside workplace nursery arrangements, but it is important to understand the distinction:

• The tax exemption on a workplace nursery does not depend on salary sacrifice -- the benefit is tax-free because of the BIK exemption, not because of a sacrifice arrangement.
• If an employer combines salary sacrifice with a workplace nursery arrangement (the employee sacrifices salary and the employer uses those savings to fund the childcare place), the arrangement must still meet the partnership/contracting conditions for the BIK exemption to apply.
• Salary sacrifice for childcare that does not meet the workplace nursery conditions does not attract any special tax relief.

Comparison with Tax-Free Childcare

Tax-Free Childcare (TFC) is the government top-up scheme open to working parents. Under TFC, the government adds 20p for every 80p you pay in, up to GBP 2,000 per year per child.

Workplace nursery schemes and TFC can both be used by the same family for different children or in different ways, but there are interaction rules. HMRC guidance states that if a child receives childcare that is fully funded by a workplace nursery arrangement (no parental contribution), TFC does not apply to that child's place. If there is a parental top-up payment (for example, for optional extras), TFC can be used for those additional costs.

Setting Up a Scheme: What Employers Need to Do

Employers wanting to offer a workplace nursery benefit should:

1. Identify a suitable registered childcare provider willing to enter a partnership arrangement.
2. Draft a formal contract establishing the employer's commitment to purchase reserved places.
3. Ensure the arrangement is available to all employees (or a non-discriminatory defined group).
4. Take professional advice from a tax specialist or employment law firm to ensure the arrangement meets HMRC's requirements before rolling it out.
5. Document the arrangement properly -- HMRC has challenged poorly structured schemes and imposed BIK charges retrospectively.

For employees, the workplace nursery scheme is the most valuable employer childcare benefit available in 2026 -- tax-free, uncapped, and potentially worth GBP 15,000 or more per year in effective savings for London parents.