What If Nursery Fees Are Costing You More Than They Cost Your Employees?

Why the nursery bill has become a retention problem for employers with female workforces.

Nearly 1 in 3 parents say it does not make financial sense to work because of the cost of childcare. For employers, that is not a childcare statistic. It is a retention nightmare.

Think about the employee you are potentially losing. You recruited them. You trained them. They know your customers, your systems and your people. They may have spent five, ten or more years building knowledge inside the business that cannot be transferred to a replacement during a two-week handover.

Then they have a baby.

Six in ten parents report feeling exhausted during the first twelve months after having a baby. More than half report feeling mentally exhausted or burnt out. More than one in ten parents who request flexible working to cover their nursery hours have the request refused.

Recent research highlights something particularly uncomfortable for employers: 76% of a parent’s experience of returning to work depends on their individual line manager.

Two new parents can return to the same company, in the same month, on the same terms, and have completely different experiences. Then there is the nursery bill.

The number that can make returning to work feel pointless

Imagine one of your employees is paying £1,800 a month for a nursery place. That is £21,600 every year, that could be more than half their take home pay!

But they do not earn £21,600 to pay that bill. They must earn considerably more, because nursery fees are normally paid from salary that has already been through Income Tax and National Insurance.

Earn. Pay tax. Pay National Insurance. Then pay the nursery from whatever is left.

For some parents, that is the moment the calculation stops making sense. They are not saying they do not want to work. They are looking at what actually arrives in their bank account, setting it against nursery fees, commuting and everything else that comes with returning, and asking whether it still adds up.

They do not leave because they stopped caring about their career. They leave because they can be working full-time but only taking home a few hundred pounds after the nursery fee costs are paid from their taxed income!

And then there is the “Long-Term Cost”

The cost does not disappear when nursery ends

A few years out of work can look temporary but consider the repercussions.

A parent taking a five-year career break at age 35 is estimated to accumulate £69,380 less pension wealth by age 67.

There are also lost promotions, slower salary progression, reduced pension contributions and years of experience that never make it onto the next CV. Also, one third of employers assume that women returning to work after a parenting break are less interested in career progression, which shapes what is offered next.

For employers, there is a second consequence. You lose experienced people, and then you spend money trying to replace them.

Nearly 1 in 3 parents say work does not make financial sense. What if their employer could change that, and save money at the same time?

The Answer: Making nursery fees less damaging to the take-home pay

Most employees pay their nursery from take-home pay. It does not have to work that way.

A Salary Sacrifice Nursery Fee Scheme, also known as the Workplace Nursery Scheme, allows qualifying nursery fees to be paid from an employee’s gross salary before Income Tax and National Insurance are calculated.

The employee keeps the same nursery. The care itself does not change. What changes is how it is paid for.

It is an established employer-supported arrangement based on Section 318 of the Income Tax (Earnings and Pensions) Act 2003. It has been in the statute book for more than two decades.

And unlike Tax-Free Childcare, there is no £100,000 earnings ceiling on the Workplace Nursery Scheme. For your senior staff, that difference is enormous. Tax-Free Childcare is withdrawn in full the moment either parent’s adjusted net income reaches £100,001, with no taper at all.

The employees with the most experience, the most responsibility and the highest replacement cost are the ones locked out of every other form of support. See a full comparison of the Workplace Nursery Scheme vs Tax-Free Childcare here: https://www.feelthebenefit.co.uk/workplace-nursery-vs-tax-free-childcare/

Consider one of your senior staff earning £125,140

Suppose they have one child in nursery costing £1,800 a month. That is £21,600 a year. Without a Salary Sacrifice Nursery Fee Scheme, those fees come out of their take-home pay.

At that income they are also inside the £100,000 to £125,140 band where the Personal Allowance is progressively withdrawn. That creates an effective 60% Income Tax rate on part of their income. Including employee National Insurance, the marginal deduction on that slice reaches 62%.

Now put the nursery fees through salary sacrifice. With annual fees of £21,600 and a management fee, the annual sacrifice is £24,840 which, because of the considerable tax paid at that income, will increase take home pay by £12,160 per year as the take home pay after nursery fees goes from £56,510 to £68,671!

That is £1,013 every month — a 56.3% reduction in the real cost of the nursery place.

Same employee. Same job. Same child. Same nursery. A completely different calculation about whether working is financially worthwhile. You can work up your own individual version of this calculation in seconds here: https://www.feelthebenefit.co.uk/employee-calculator/#calculator

The Employer Position

Salary sacrifice reduces the employee’s gross salary, which reduces the employer’s National Insurance bill with it.

Using the same £125,140 example, the employer’s NI reduces from £18,021 to £14,295, and even after gifting the nursery £150 per month as part of the scheme the employer will save £1,926 too

That is why we think the Workplace Nursery Scheme should be viewed differently from most employee benefits. It is not another expense for HR to justify. It makes a nursery place dramatically more affordable for an employee while reducing employment costs for the business at the same time.

Model the numbers for your workforce with the employer calculator here: https://www.feelthebenefit.co.uk/employer-calculator/#calculator

To recap, An employee earning £125,140 with a £21,600 annual nursery bill saves £12,161 a year through a Workplace Nursery Scheme, while the employer gains £1,926.

Now compare saving £1,926 with the cost of a replacement.

Recruitment fees. Management time. A vacant role. Lost productivity. Training. Onboarding. Customer relationships. Institutional knowledge. Months before a replacement reaches the same level of effectiveness.

We don’t know the price for those invaluable elements, but you probably have a better idea, whether it is a financial cost or the opportunity cost invested in hiring, training, etc. Anyone who has replaced a senior person knows roughly what it costs and knows that an invoice from the recruiter can be the part you notice the least.

There are other immeasurable elements, which is exactly why they will remain unnoticed: consider the staff elsewhere in your organisation who recognise these nursery costs and draw their own conclusions about whether this is either the right time or the right place to start a family.

There is a lot to consider in the above, but there are opportunities too, the threat of high nursery fees does not have to be such an issue for your company or your staff with the right approach taken to minimise the financial impact for everyone involved.

Author: Vic Johnston
Position: Director at Feel The Benefit Ltd – www.FeelTheBenefit.co.uk

Having spent more than a decade providing salary sacrifice benefits, in particular this nursery fee scheme to more than a thousand UK businesses of all shapes and sizes, Feel the Benefit provides a wealth of experience on how these schemes can benefit companies and their employees. To have a quick discussion about how this could work in your organisation, schedule a call here: https://calendly.com/vic-feelthebenefit/30min

Article in full can be found here: https://www.feelthebenefit.co.uk/news/nursery-fees-female-retention/