Parents saving up to £10,000 in nursery benefits may face unexpected tax bills

Working parents could be hit with unexpected tax bills because of a clampdown on the misuse of a childcare “benefit” offered by some employers that lets people enjoy savings of up to £10,000 a year.

HM Revenue and Customs has turned its sights on some workplace nursery benefit schemes which allow employees to pay the fees out of their pre-tax salary, resulting in them making big savings on income tax and national insurance.

This tax break was originally introduced in 1990 to encourage employers to provide nursery places for staff, either by opening an onsite nursery or by teaming up with other businesses to jointly finance and run one.

These schemes are typically marketed to employers by specialist firms and have increased in popularity as childcare costs have soared.

However, HMRC has said it believes some of the schemes do not meet its rules, which impose quite challenging requirements on employers when it comes to financing and helping to manage the nurseries used by their staff.

In an update published on its website, it said that while it believed the majority were compliant, “we have been alerted to a small number of scheme operators advertising their services with HMRC approval where the … requirements are not met”.

Earlier this month, an employee benefits company called Enjoy Benefits – thought to be the leader in this sector, with hundreds of employers signed up – was stating on its website that these schemes were “easy to set up for any size of business” and that “in reality there is little for the employer to do” as Enjoy Benefits “then take care of the administration”.

A few hours after the Guardian approached the company to ask about this wording, it was removed from the website.

Another provider, gogeta, said on its website that the scheme was “incredibly simple [for employers] to set up and use … Simply sign up, get your employees to enrol and let us handle the rest.”

HMRC said it did not comment on individual cases, and there was nothing to suggest it was looking at Enjoy Benefits – which declined to speak to the Guardian – or gogeta.

The Enjoy Benefits website includes testimonials from parents who variously say the scheme is a “no-brainer” and has enabled them to make huge savings.

One parent, a magazine editor, is quoted as saying: “As a family we’ve saved £1,400 in six months, which has been a huge help. To think we’ll be almost £3,000 better off at the end of 12 months is staggering. My daughter’s nursery has used the money it received to improve its garden area. It’s a winning situation all round.”

Meanwhile, forums on the website Reddit feature workers who say they are saving hundreds of pounds a month.

One said he was signed up to one of these schemes via his work, and “it saves me about £500 a month … and the nursery spent their £1,200 on new bikes for the kids. A real win-win.”

Another said: “We’ve just signed up for this through my wife’s work. The saving for us is around £850pm [per month] – a lot!”

Employee benefits firms say the annual saving for a higher-rate taxpayer paying nursery fees of £800 a month would be £3,336, while for someone with a monthly bill of £2,000 it would be £8,340. Enjoy Benefits says some parents in London, especially those with more than one child in nursery, can save more than £10,000 a year.

HMRC said there were a number of commercially marketed schemes “which set out to exploit” the tax exemption, and that in its opinion the tax break “does not apply” to arrangements where the employer “really does no more than buy in places at a commercially run nursery”.

HMRC requires employers to make a “real and substantial commitment” to funding the nursery, and they must accept the financial risk associated with running it. Employers “must, in a real sense, play a part” in the management of the nursery – for example, being closely involved in appointing and monitoring the performance of the nursery staff.

The websites of a number of providers, including Enjoy Benefits and gogeta, state that the nursery will receive an additional £100 a month payment from the employer – typically for each child or employee – on top of the usual fees, which can go towards running costs and upkeep.

HMRC said it “does not consider only paying fixed costs of ‘£x’ (such as a notional £100 per month per employee’s child) to a commercially run nursery already in existence satisfies the requirement”.

It added: “If the conditions around the partnership requirements are not met, the exemption will not apply.”

If a scheme does not meet the criteria, the employee – to use the official terminology – “remains chargeable on their original gross pay”. One tax expert said there was a risk employees could “end up with an unexpected tax bill” if the scheme was unwound.

Following the publication of the new tax rules, gogeta said: “We welcome this further guidance from HMRC which we have been seeking for some time and are updating our scheme accordingly to maintain the highest of compliance standards for our clients.”