13 January 2024
It has recently been reported that Jeremy Hunt’s free childcare pledge announced in the March 2023 Budget is ‘doomed to fail’ due to the number of childcare providers forced to close amid a staffing crisis, uneconomic financial returns and a lack of government support. Whilst it is expected that an additional 180,000 childcare places will be required by the end of 2025 if the rollout is to work, there were 17,800 fewer childcare places available at 31 August 2023 than at 31 August 2022.
In April 2024, the proposed expansion is due to begin with parents of two-year-olds becoming eligible for 15 hours of free childcare per week. Further expansion is proposed in September 2024 and September 2025. The government has increased the rates payable to childcare providers in line with the latest increase in the national living wage. However, according to the charity ‘Pregnant then Screwed’, this is unlikely to be sufficient to cover the cost of providing childcare places generally.
In addition, the way the free childcare system is currently implemented could act as a disincentive to working for some parents following the chancellor’s decision to keep the income limit for childcare benefits frozen. At the point one parent exceeds £100,000 in income, all childcare support is withdrawn, and both the free childcare hours and the entitlement to ‘tax-free childcare’ (where parents receive some tax relief for their expenditure on childcare) are removed. This means that higher earning families can be effectively ‘taxed’ at a marginal rate of more than 100% as potentially thousands of pounds in childcare support is withdrawn if one parent’s income exceeds this limit. This withdrawal of childcare support applies in addition to the tapered reduction of the income tax personal allowance for individuals earning over £100,000, and the high income child benefit charge for those earning more than £50,000.
The income limit creates a cliff-edge, with individuals earning exactly £100,000 retaining their entitlement to tax relief and their family’s entitlement to free childcare, whereas those earning just £1 more lose both. It also applies where just one parent exceeds the income limit, meaning a household with one parent earning £100,001 is no longer entitled to support, but a household with two parents each earning exactly £100,000 retains its entitlement.
The £100,000 income limit was introduced in 2017, when tax-free childcare and free childcare hours began, and has never been increased. In 2023, due to high inflation, this would now be equivalent to a salary of £127,700. This means that thousands more parents are likely to have been dragged into this childcare tax trap.
Anomalies such as the childcare tax trap may often result in higher earners contributing more into pensions in order to reduce their ‘net adjusted income’, or in some cases reducing hours or turning down overtime. The outcome of all of this is that individuals are making decisions to avoid adverse personal financial implications that are likely counter-productive for economic growth.
On reflection, it appears many of these childcare support measures have been implemented in a rushed manner, without thorough consideration of the implications for both parents and childcare providers. In order to improve the system, a complete overhaul may be needed, with additional consideration given to how childcare is provided and the value placed on it. A lack of access to childcare can be a significant barrier to gender equality in the workplace, and with various studies showing gender diverse workplaces can be more productive, it could be in all of our interests to solve this problem.