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Childcare vouchers and maternity pay

A recent case has shed important light on whether childcare vouchers should be taken into account when calculating maternity pay.


Both employees and employers have benefited from salary sacrifice arrangements for childcare vouchers through savings in NICs and tax.

HMRC’s Guidance entitled “Statutory maternity leave – salary sacrifice and non-cash benefits” states that the vouchers are considered to be a non-cash benefit and therefore not “remuneration”, with the result that employers have to continue to provide childcare vouchers to women on maternity leave without being able to deduct the corresponding amount from the employee’s Statutory Maternity Pay (SMP).

What happened in this case?

In this case – Peninsula Business Services v Donaldson [2016] – the Employment Appeal Tribunal (EAT), had to consider whether childcare vouchers should be classified as a “non-cash benefit” (in accordance with the HMRC’s Guidance) or part of the employee’s remuneration with the result that they would not have to be provided during periods of SMP or unpaid maternity leave.

The facts

Peninsula Business Services (PBS) offered employees childcare vouchers through a salary sacrifice scheme subject to employees agreeing to cease to take the vouchers while on maternity leave.

Mrs Donaldson brought a claim in the Employment Tribunal (ET) for unlawful sex discrimination and breach of the Maternity and Parental Leave Regulations 1999 (the Regulations) on the basis that the requirement to agree to give up the vouchers whilst on maternity leave was discriminatory.

What did the Employment Tribunal say?

The ET found in Mrs Donaldson’s favour, stating that childcare vouchers were a “non-cash benefit”, citing HMRC’s Guidance and, as such, PBS had breached the Regulations.

What did the Employment Appeal Tribunal say?

PBS appealed to the EAT. The EAT, in choosing to ignore the HMRC guidance, stated that it could not have been Parliament’s intention to require employers to continue providing vouchers “at a time when there was no salary that could be sacrificed in respect of them”. Furthermore, the EAT stated that the HMRC’s guidance was wrong and had no legislative basis.

The EAT found that such a scheme was merely a “diversion” of the employee’s salary rather than a true sacrifice and should therefore be regarded as part of remuneration.

What does this mean for employers?

This decision is likely to be welcomed by employers. However, it is not yet known whether it will be appealed further. It should also be noted that the EAT has itself acknowledged that it is “apprehensive” in respect of its findings.

The case raises a degree of confusion about the status of childcare vouchers. The EAT stating that they are a “diversion” of salary indicates that this would, in theory, be something which should be subject to tax; something HMRC is specifically allowing employees to bypass through the salary sacrifice scheme.

It also raises the question of how SMP for the first 6 weeks is calculated; whether the salary pre-childcare voucher deduction is used or, as has previously been the case, the salary post-childcare voucher deduction.

Whilst the impact of the case may be short lived due to the new tax-free childcare scheme coming into force in 2017, employers may still have employees who currently received childcare vouchers who choose to continue to do so. Should those employees take maternity, paternity or shared parental leave, this case will be of interest.

Finally, employers who provide childcare vouchers on top of salary or other non-cash benefits must continue to provide these whilst an employee is on maternity leave.

How can Ward Hadaway help?

For further information on the issues raised by this update, please do not hesitate to contact a member of the Employment Team.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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