How salary sacrifice childcare vouchers reduce student loan repayments while saving tax and NI
Childcare vouchers through salary sacrifice create a unique triple benefit for parents with student loans: you save income tax (20-40%), save National Insurance (12% employee + 13.8% employer), and crucially, you reduce your student loan repayments by lowering your taxable income. For a basic-rate taxpayer with a Plan 2 loan earning £40,000, sacrificing £1,000/year for childcare vouchers saves £200 tax + £120 NI + £90 student loan = £410 total benefit.
However, childcare vouchers closed to new entrants in October 2018, replaced by Tax-Free Childcare. If you joined before October 2018, you can continue using vouchers—and for most people with student loans, staying on vouchers is significantly better than switching to Tax-Free Childcare. The salary sacrifice mechanism reduces your gross income for all purposes, including student loan calculations, creating hidden value that Tax-Free Childcare doesn't offer. However, childcare vouchers closed to new entrants in October 2018, replaced by Tax-Free Childcare. If you joined before October 2018, you can continue using vouchers—and for most people with student loans, staying on vouchers is significantly better than switching to Tax-Free Childcare. The salary sacrifice mechanism reduces your gross income for all purposes, including student loan calculations, creating hidden value that Tax-Free Childcare doesn't offer.
This guide explains how childcare vouchers work with student loans, calculates the exact benefit across different salaries and loan plans, compares vouchers versus Tax-Free Childcare for those with choice, and provides a decision framework for maximizing your household's childcare support while minimizing total costs. Whether you're currently using vouchers or choosing between schemes, understanding the student loan interaction is crucial for optimal financial planning.
Childcare vouchers are a salary sacrifice scheme where you exchange part of your salary for vouchers to pay for registered childcare, receiving tax and National Insurance savings.
Maximum amount:
£55/week (£243/month) if basic rate taxpayer
Scheme status:
Closed to new joiners since October 2018
Existing members:
Can continue using indefinitely
How it works:
Salary sacrifice—gross pay reduced before tax/NI/loan
Annual limit:
£2,916 for basic rate, £1,212 for higher rate
Both parents can use:
Each parent can sacrifice independently
If you weren't using childcare vouchers by October 4, 2018:If you weren't using childcare vouchers by October 4, 2018:
If you were using vouchers pre-October 2018: You have a choice to stay on vouchers or switch to Tax-Free Childcare. Once you switch, you cannot return to vouchers. Read this guide carefully before deciding.
| Your Tax Band | Weekly Max | Monthly Max | Annual Max |
|---|---|---|---|
| Basic rate (20%) | £55 | £243 | £2,916 |
| Higher rate (40%) | £28 | £124 | £1,488 |
| Additional rate (45%) | £25 | £110 | £1,320 |
Note: These are maximums per parent. If both parents work and both are in scheme, household can sacrifice up to £5,832/year (both basic rate) or mixed amounts if different tax bands.
Salary sacrifice is a contractual arrangement where you agree to reduce your cash salary in exchange for a non-cash benefit (childcare vouchers). This reduction happens before PAYE calculations, affecting all deductions.
Sign Up With Employer
If your employer offers childcare vouchers (and you joined pre-October 2018), sign up through HR. You specify how much to sacrifice per month (up to £243 if basic rate).
Gross Salary Reduces
Your employment contract is modified. If you earned £40,000, it now states £37,084 (£40,000 - £2,916 annual sacrifice). This is your new gross salary for all tax purposes.
PAYE Calculations on Reduced Amount
HMRC sees £37,084, not £40,000. Income tax, National Insurance, and student loan repayments all calculated on the lower figure. This is where the savings occur.
Receive Vouchers
Each month, voucher provider (e.g., Computershare, Sodexo, Edenred) credits your account with vouchers. You use these to pay registered childcare providers (nurseries, childminders, after-school clubs).
Net Pay Reflects Savings
Your net take-home pay is higher than if you'd been paid £40,000 cash and bought childcare yourself, because you've saved tax, NI, and student loan deductions on the sacrificed amount.
Scenario: Earning £40,000, Plan 2 loan, sacrificing maximum £243/month (£2,916/year)
Without Salary Sacrifice:
• Gross salary: £40,000
• Income tax: £5,486 ((£40,000 - £12,570) × 20%)
• Employee NI: £3,464 (12% on £28,770)
• Student loan: £1,143 ((£40,000 - £27,295) × 9%)
• Net pay: £29,907
Then pay childcare from net pay: -£2,916
Final available: £26,991
With Salary Sacrifice:
• Gross salary: £37,084 (£40,000 - £2,916)
• Income tax: £4,903 ((£37,084 - £12,570) × 20%)
• Employee NI: £3,114 (12% on £25,854)
• Student loan: £881 ((£37,084 - £27,295) × 9%)
• Net pay: £28,186
Childcare already paid via vouchers
Final available: £28,186
Net benefit: £1,195/year better off
Breakdown: £583 tax saved + £350 NI saved + £262 student loan saved = £1,195
Effective saving: 41% of sacrificed amount (£1,195 ÷ £2,916)
The key is that salary sacrifice happens before any deductions:
You'regetting £2,916 worth of childcare for only £1,721 out-of-pocket cost (£2,916 - £1,195 savings). Effective discount: 41%.
Reduced gross salary affects other things:
Mortgage applications, pension contributions (if percentage-based), some employment benefits based on salary. Usually the childcare savings outweigh these downsides, but be aware.
Vouchers must be used for registered childcare:
Cannot use for informal arrangements (grandparents paid in cash, unregistered childminders). Provider must be Ofsted-registered or equivalent.
Commitment required:
You typically commit for a period (often 12 months minimum). Can't easily switch on/off monthly. Plan accordingly.
The student loan reduction from childcare vouchers varies significantly by loan plan, salary level, and amount sacrificed. Here's the detailed breakdown:
Assuming maximum basic rate sacrifice of £2,916/year:
| Loan Plan | Threshold | Repayment Rate | Annual Saving |
|---|---|---|---|
| Plan 1 | £22,015 | 9% | £262 (9% of £2,916) |
| Plan 2 | £27,295 | 9% | £262 (9% of £2,916) |
| Plan 4 | £31,395 | 9% | £262 (9% of £2,916) |
| Plan 5 | £25,000 | 9% | £262 (9% of £2,916) |
| Postgraduate | £21,000 | 6% | £175 (6% of £2,916) |
Important: These savings only apply if you're earning above the threshold. If your salary (after sacrifice) drops below threshold, you pay £0 anyway—but you still save the tax and NI.
For basic rate taxpayers (Plan 2 loan) sacrificing maximum £2,916/year:
Salary: £30,000 (just above Plan 2 threshold)
• Income tax saving: £583 (20% of £2,916)
• NI saving: £350 (12% of £2,916)
• Student loan saving: £245 (was £2,705 above threshold, now £0—crossed under)
Total benefit: £1,178 (40.4%)
Salary: £35,000
• Income tax saving: £583
• NI saving: £350
• Student loan saving: £262 (9% of £2,916)
Total benefit: £1,195 (41.0%)
Salary: £45,000
• Income tax saving: £583
• NI saving: £350
• Student loan saving: £262
Total benefit: £1,195 (41.0%)
Salary: £55,000 (just into higher rate band)
• Income tax saving: Mixed rates, approximately £700 (partial higher rate)
• NI saving: £350
• Student loan saving: £262
Total benefit: £1,312 (45.0%)
Note: At £55k, max sacrifice drops to £1,488 (higher rate limit)
One powerful scenario is when salary sacrifice drops you below the repayment threshold entirely:
Example: Earning £30,000 with Plan 2 loan
Without sacrifice:
• Income: £30,000
• Plan 2 threshold: £27,295
• Above threshold by: £2,705
• Annual loan repayment: £243 (£2,705 × 9%)
With £2,916 sacrifice:
• Income: £27,084 (£30,000 - £2,916)
• Below threshold by: £211
• Annual loan repayment: £0
Loan saving: £243 completely eliminated!
This is on top of the £583 tax + £350 NI savings. Total benefit: £1,176 (40.3%)
Strategic insight: If you're earning just above any loan threshold, salary sacrifice can eliminate repayments entirely for that year. Check your exact salary relative to threshold.
Beyond annual savings, salary sacrifice affects your loan trajectory:
Real-world scenarios showing exact costs and benefits:
Setup:
Without Vouchers:
Gross salary: £35,000
Income tax: £4,486
Employee NI: £2,214
Student loan: £693
Net pay: £27,607
Pay nursery from net: -£14,400
Left over: £13,207
With Vouchers (£2,916 via sacrifice):
Gross salary: £32,084
Income tax: £3,903
Employee NI: £1,864
Student loan: £431
Net pay: £25,886
Vouchers cover: £2,916 of £14,400
Pay remaining from net: -£11,484
Left over: £14,402
Better off by: £1,195/year
Savings: £583 tax + £350 NI + £262 student loan = £1,195
You'repaying £1,721 for £2,916 worth of childcare (41% discount)
Setup:
Parent A (Plan 1, £42,000):
Without Vouchers:
Tax: £5,886
NI: £3,054
Student loan: £1,799 (Plan 1 threshold £22,015)
Net: £31,261
With £2,916 Sacrifice:
Tax: £5,303
NI: £2,704
Student loan: £1,536
Net: £30,541
Parent A saves: £1,195 (£583 tax + £350 NI + £262 loan)
Parent B (Plan 2, £38,000):
Without Vouchers:
Tax: £5,086
NI: £2,574
Student loan: £963 (Plan 2 threshold £27,295)
Net: £29,377
With £2,916 Sacrifice:
Tax: £4,503
NI: £2,224
Student loan: £701
Net: £27,656
Parent B saves: £1,195 (£583 tax + £350 NI + £262 loan)
Household total savings: £2,390/year
Paying £3,442 for £5,832 worth of childcare (41% discount)
Covers 22% of annual £26,400 nursery costs while saving £2,390
Effective cost of childcare: £24,010 instead of £26,400
Setup:
Without Vouchers:
Gross salary: £60,000
Income tax: £11,432
Employee NI: £4,534
Student loan: £2,943
Net pay: £41,091
With £1,488 Sacrifice:
Gross salary: £58,512
Income tax: £10,837
Employee NI: £4,355
Student loan: £2,810
Net pay: £40,510
Better off by: £762/year
Savings: £595 tax (40% of £1,488) + £179 NI (12% of £1,488) + £134 student loan (9% of £1,488)
Effective saving: 51% of sacrificed amount (higher due to 40% tax rate)
Paying only £726 for £1,488 worth of childcare
Note: Higher rate taxpayers have lower maximum sacrifice (£1,488 vs £2,916) but higher percentage savings (51% vs 41%) due to 40% tax rate. Net benefit depends on how much childcare you need.
If you're currently on childcare vouchers (joined pre-October 2018), you must decide whether to stay or switch to Tax-Free Childcare. Once you switch, you cannot return to vouchers. This decision is particularly important if you have student loans.
Many parents with student loans are better off staying on childcare vouchers despite Tax-Free Childcare offering more absolute support. The student loan interaction makes vouchers more valuable than they appear.
DO NOT switch to Tax-Free Childcare without calculating your specific scenario. The decision is permanent.
| Feature | Childcare Vouchers | Tax-Free Childcare |
|---|---|---|
| Maximum benefit | £2,916/year per parent (basic rate) | £2,000/year per child (£4,000 if disabled) |
| How it works | Salary sacrifice—reduces gross income | Government top-up—£2 for every £8 you pay |
| Tax saving | Yes (20-40%) | No |
| NI saving | Yes (12%) | No |
| Student loan saving | Yes (6-9%) | No |
| Both parents can use | Yes—each gets separate £2,916 | Yes—£2,000 per child regardless of parents |
| Income limits | None (amount reduces if higher rate) | Both parents under £100k individually |
| Availability | Closed (existing members only) | Open to all eligible families |
| Self-employed | No (requires employer) | Yes |
Calculate the effective benefit of each option for your household:
Step 1: Calculate Childcare Vouchers Benefit
Voucher amount per parent: Min(£2,916 if basic rate, actual sacrifice amount)
× Tax rate (20% or 40%)
+ (Voucher amount × 12% NI)
+ (Voucher amount × 9% student loan, if above threshold)
= Total vouchers benefit
Step 2: Calculate Tax-Free Childcare Benefit
Number of children × £2,000
= Total TFC benefit
Step 3: Compare
If vouchers benefit TFC benefit → Stay on vouchers
If TFC benefit vouchers benefit → Consider switching
Childcare Vouchers:
Parent A sacrifices: £2,916
• Tax saving: £583
• NI saving: £350
• Loan saving: £262
Parent B sacrifices: £2,916
• Tax saving: £583
• NI saving: £350
• Loan saving: £262
Total benefit: £2,390
Tax-Free Childcare:
One child eligible for: £2,000
(Government pays £2 for every £8)
No tax saving
No NI saving
No loan saving
Total benefit: £2,000
Winner: Childcare Vouchers by £390/year
Stay on vouchers if both parents earning and both can sacrifice maximum.
Childcare Vouchers:
Only one parent can sacrifice: £2,916
• Tax saving: £583
• NI saving: £350
• Loan saving: £262
Total benefit: £1,195
Tax-Free Childcare:
Two children: £2,000 × 2 = £4,000
Total benefit: £4,000
Winner: Tax-Free Childcare by £2,805/year
Switch to TFC if one parent not working or you have multiple children and only one voucher-eligible parent.
Childcare Vouchers:
Both parents: £2,390 (from earlier)
Total benefit: £2,390
Tax-Free Childcare:
Three children: £2,000 × 3 = £6,000
Total benefit: £6,000
Winner: Tax-Free Childcare by £3,610/year
Multiple children heavily favor TFC because benefit scales per child, while vouchers are per parent regardless of children.
Real-world situations showing how childcare vouchers interact with student loans:
Situation:
Emma returning to work after 12 months maternity leave. Salary £36,000, Plan 2 loan £38,000 balance. Nursery costs £1,100/month. Joined voucher scheme in 2016, deciding whether to continue or switch to TFC.
Analysis:
Decision: Stay on vouchers—better by £195/year even with one child
If Emma had twins, TFC (£4,000) would beat vouchers (£1,195 saving + £2,916 value = £4,111 equivalent). Close call—but vouchers still slightly ahead.
Situation:
James earns £95,000, Sophie earns £110,000. Both have Plan 2 loans. Two children, nursery + after-school club = £2,400/month (£28,800/year). Currently on vouchers.
Analysis:
Decision: Definitely stay on vouchers—no TFC alternative
High earners over £100k are locked out of TFC but can still use vouchers. This makes vouchers extremely valuable for high-earning couples even though maximum sacrifice is lower.
Situation:
Raj employed earning £42,000 (Plan 2 loan), using vouchers. Partner Maya self-employed earning £38,000 (no loan). One child, nursery £950/month.
Analysis:
Decision: Stay on vouchers (Raj), Maya can't use either way
Decision: Stay on vouchers (Raj), Maya can't use either way
If Raj switches to TFC, household gets £2,000. If Raj stays on vouchers, household gets £4,111 equivalent benefit. Clear win for vouchers despite Maya being ineligible.
Situation:
Sarah £40,000 (Plan 2), Tom £44,000 (Plan 1). Four children (twins + two others), childcare £3,200/month = £38,400/year. Both on vouchers.
Analysis:
Decision: Switch to Tax-Free Childcare
With 4 children, TFC's per-child benefit massively outweighs vouchers' per-parent benefit. Even with student loan savings, vouchers can't compete when you have 3+ children.
Strategic tips to get the most from childcare vouchers:
Always sacrifice the maximum allowed for your tax band (£243/month basic rate, £124/month higher rate) if your childcare costs justify it:
If both parents work for companies offering vouchers:
Your sacrifice amount is based on tax year income:
Vouchers work for more than just nursery:
Check provider registration—maximizing voucher use maximizes your savings.
If planning maternity/paternity leave or sabbatical:
If you're an existing voucher member:
Follow this framework to determine your optimal childcare support strategy:
Question 1: Are you currently on childcare vouchers (joined pre-October 2018)?
→ YES: Continue to Question 2
→ NO: You can only use Tax-Free Childcare. Apply at childcarechoices.gov.uk
Question 2: Does your employer still offer vouchers?
→ YES: Continue to Question 3
→ NO: Employer has closed scheme. You must switch to TFC
Question 3: Calculate your voucher benefit
For each working parent:
A. Maximum sacrifice: £2,916 (basic rate) or £1,488 (higher rate)
B. Tax saving: Amount × your tax rate (20% or 40%)
C. NI saving: Amount × 12%
D. Loan saving: Amount × 9% (if above threshold) or 6% (postgrad)
Parent benefit = B + C + D
Household voucher benefit = Sum both parents
Question 4: Calculate your TFC benefit
Number of children × £2,000 = TFC benefit
(£4,000 per disabled child)
Question 5: Compare and decide
→ If vouchers benefit ≥ TFC benefit:
Stay on childcare vouchers. Do NOT switch.
→ If TFC benefit vouchers benefit by £500+:
Consider switching to Tax-Free Childcare.
→ If TFC benefit vouchers but difference under £500:
Borderline case. Consider convenience factors: vouchers automatic via payroll, TFC requires you to pay in every 3 months. Vouchers simpler for most people.
Calculated exact voucher benefit including tax, NI, AND student loan savings for both parents
Calculated exact TFC benefit (£2,000 × number of children)
Verified neither parent earns over £100k (TFC income limit)
Considered future plans: more children? Return to work after career break?
Understood that switching is permanent—cannot return to vouchers
Confirmed TFC benefit exceeds vouchers by at least £500/year to justify complexity of switching
For basic rate taxpayers with student loans, salary sacrifice childcare vouchers save 41% of the sacrificed amount (20% tax + 12% NI + 9% loan). This means you're paying only £1,721 for £2,916 worth of childcare. Existing voucher members should carefully calculate before switching to Tax-Free Childcare—the hidden student loan benefit often tips the balance in favor of staying on vouchers.
If you have student loans and access to childcare vouchers, you're in a privileged position. The scheme closed in 2018, but existing members can continue indefinitely. Don't give up this valuable benefit without thorough analysis.
UK Education Policy Specialist
With over 15 years of experience in UK education policy and student finance, Dr. Sharma founded Student Loan Calculator UK to help students navigate the complex world of student loans.