The workplace nursery exemption is genuinely valuable — uncapped, unlike the closed childcare voucher scheme, and still open to new participants. But HMRC's position on the commercially marketed salary sacrifice versions is blunt: in its opinion the exemption does not apply where the employer really does no more than buy places at a commercially run nursery. HMRC refreshed that guidance in September 2026.
The exemption
Section 318 ITEPA 2003 exempts employer-provided childcare, and where the conditions are met the whole cost of the benefit is exempt from tax. There is no weekly or annual cap. It was substituted with effect from 6 April 2005, which renewed the unlimited exemption while adding significant amendments, and the registration requirements have been updated since.
Four conditions must all be met:
- Condition A — the child. The employee's child or stepchild maintained at their expense, or a child resident with them for whom they have parental responsibility;
- Condition B — the premises. Not used wholly or mainly as a private dwelling, and meeting the applicable registration requirements for England, Wales, Scotland or Northern Ireland;
- Condition C — who makes the premises available. Either the employer alone, or a partnership arrangement (see below);
- Condition D — the scheme. Open to the employer's employees generally, or generally to those at a particular location.
Condition C is where schemes fail
The statutory wording is the crux. The premises must be made available by one or more of those persons, and the employer must be wholly or partly responsible for financing and managing the provision of the care.
A partnership may include a commercial childcare provider — that is expressly permitted. But the employer must still satisfy both limbs: financing and managing. Satisfying one is not enough.
HMRC's tests for each are specific.
Financing requires "some real and substantial commitment to funding the facility and bearing the risks associated with operating a childcare facility". Merely buying in places from a commercial nursery, whether ad hoc or on a more structured basis, fails. So does an arrangement where the employer's participation in financing is "little more than a token gesture". What can work: an agreement to meet a set proportion of the overall cost of providing the care; a guarantee to indemnify against losses; or, for a newly established facility, a long-term undertaking to pay a fixed periodical contribution calculated to ensure overall financial viability.
Managing does not require day-to-day management, but requires "more than simply giving advice or being consulted from time to time about the broad policies". Specifically: "Having a right to a place on a committee which has no particular brief and little or no power to influence the way in which the care is provided is not sufficient." Real involvement means appointing and monitoring childcare staff, determining the extent and conditions of care, and allocating places. HMRC's summary is that employers "must, in a real sense, play a part in management".
The marketed schemes
HMRC describes the arrangements it is concerned with precisely, and the description will be recognisable to anyone who has been pitched one:
- The employee enters a salary sacrifice, giving up pay equal to the cost of the nursery place;
- The employer pays for a nursery place for the employee's child, possibly at a nursery run by the scheme promoter or at an independent nursery;
- In addition to the nursery fee, the employer pays the nursery an additional sum;
- The employer appoints the scheme promoter to act as its "agent" at meetings of the nursery management committee.
HMRC's conclusion is unambiguous: "The exemption was not intended to apply, and in the opinion of HMRC does not apply, to commercially marketed schemes of the kind described… where the employer really does no more than to buy in places at a commercially run nursery." On the two limbs specifically — the additional monetary contribution "does not satisfy the 'financing' requirement", and appointing the promoter as agent "does not satisfy the 'management' requirement".
Two things to be honest about when advising on this. First, it is HMRC's stated opinion, and an employer has a right of appeal to the First-tier Tribunal. Second, there is no reported tribunal decision on section 318 partnership arrangements that settles it either way — so anyone citing case law in support of a marketed scheme should be asked to produce it.
What is not in doubt is the exposure if HMRC is right: the sacrificed salary becomes taxable earnings with National Insurance, across every participating employee and every year still in time.
The legacy voucher scheme, for comparison
Employer-supported childcare — vouchers and directly contracted care — closed to new applicants on 4 October 2018, replaced by Tax-Free Childcare. Employees who had joined and had their wages adjusted on or before that date can continue while the employer offers it and they remain eligible.
The exempt amounts for employees who joined on or after 6 April 2011 are weekly: £55 basic rate, £28 higher rate, £25 additional rate. The employer must estimate the employee's relevant earnings amount to determine the band. An employee gets one exempt amount per tax week regardless of how many children, and cannot claim under both the voucher and other-care provisions for the same week.
The contrast is the selling point of a genuine workplace nursery: £55 a week capped and closed, against an uncapped exemption still open to new joiners. It is also why the marketed schemes exist.
What to do
If you are considering a scheme, test Condition C against HMRC's two limbs before anything else, and be sceptical of any structure whose financing element is a modest top-up fee and whose management element is a committee seat exercised by the promoter. Ask what risk the employer actually bears and what decisions it actually makes.
If you already operate one, the position is worth reviewing now rather than at an employer compliance review — particularly given HMRC refreshed this guidance in September 2026. The question to answer is whether you could evidence real financial risk and real management involvement to an inspector.
And if you run, or are building, a genuine nursery for your own staff, the exemption does what it says: uncapped relief on the whole cost. That is the version the legislation was written for.
Acumon advises employers on benefits, salary sacrifice and employer compliance through employment tax and payroll management work, with a payroll audit where an arrangement needs testing — see also our guide to tax-free gifts to employees. If a provider has told you their scheme is HMRC-approved, that is the claim to examine first.