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HMRC internal manual

Employment Income Manual

Benefits: exemption for workplace nurseries: commercially marketed nursery schemes: tax consequences

  • firstly, is the salary sacrifice effective? If not, then the employee remains chargeable on their original gross pay and the employer should continue to operate PAYE, and account for NIC, on that amount.
  • secondly, if the salary sacrifice is effective, is the employee’s nursery benefit taxable as earnings within Section 62 ITEPA 2003, or only as a benefit-in-kind under Section 203? (See the note on Finance Act 2005 below.)
  • finally, if (and only if) the benefit is taxable only under Section 203, do the arrangements satisfy the conditions for exemption in Section 318?

The salary sacrifice

For guidance on this aspect, please see EIM42750 onwards and EIM01141.

Section 62 or Section 203?

This point is not relevant from 6 April 2005. Section 16 FA 2005 extended the exemption for all employer provided childcare. From that date the benefit is exempt from a charge to income tax not just a charge under the benefits code.

For periods before 6 April 2005 the workplace nursery exemption applies only to benefits that are treated as earnings by Section 203 (see EIM21900). If the benefit is taxable as earnings within Section 62 the question of exemption under Section 318 does not arise.

In general, Section 62 will apply if:

  • the contract for the nursery place is between the employee and the nursery, so that when the employer pays the nursery they are satisfying the employee’s pecuniary liability (see EIM00580) or
  • if the employee can at any time give up the nursery place and revert to their original salary (the ‘Heaton v Bell’ principle, see EIM00570).

The major scheme promoters generally manage to avoid these situations, but the points are worth bearing in mind if you are dealing with a one-off scheme.

Does the workplace nursery exemption apply?

The exemption for workplace nurseries in Section 318 ITEPA 2003 was introduced to encourage employers to provide nursery places for employees, either by opening a nursery on their own premises or by combining with other employers to jointly finance and run a nursery. The exemption was not intended to apply, and in the opinion of HMRC does not apply, to commercially marketed schemes of the kind described in EIM21970, where the employer really does no more than to buy in places at a commercially run nursery.


  • the additional monetary contribution that the employer is required to make does not satisfy the ‘financing’ requirement (see EIM21925) and
  • the appointment of the scheme promoter to act as the company’s agent does not satisfy the ‘management’ requirement (see EIM21930).

For guidance on dealing with disputes if the employer or employee will not accept HMRC’s view, see EIM21973.