What impact will extra childcare support have for working parents?

Published on Tax and Welfare

The final report of the Commission on Living Standards, a broad group of leading employers, trade unionists, economists and heads of parents’ groups brought together by the independent think-tank the Resolution Foundation, was launched on Wednesday.

A key recommendation put forward in the report was to extend the Early Years Entitlement (EYE) of 15 free hours of childcare for all three and four year olds to 25 hours a week, and from 38 to 47 weeks per year. Hours 16 to 25 would be charged for, but at a nominal rate of just £1 per hour. This would mean 25 hours of childcare would cost just £10 a week. This change would make it easier for second earners in couple households, predominantly mothers, to take up a part-time employment.

The chart below is a variation on one presented in the report (inspired by the Guardian’s take on it) and relates to a couple with two children, aged one and four, in which the main earner (typically the dad) works full-time on £20 per hour. The second earner (typically the mum) is assumed to have a wage of £10 per hour and is considering how many hours to work, or even whether to work at all, since the fewer hours she works the more the family saves on childcare costs. It is assumed that the family require 1.2 hours of childcare for every hour the mum works to allow for travel time, etc.

The chart shows how the mum’s gross income increases as she increases the number of hours she works per week, and how much of her income the family keeps once tax, NICs, benefits and childcare costs have been accounted for. This additional amount that the family keeps, i.e. extra disposable income, is the gain to family from the mum working. If the gain to working additional hours is very small then the incentive for the mum to work is weak.

The chart shows that under the proposed extension to the Early Years Entitlement the family get to keep more of the mum’s income, meaning the proposal has a positive impact her work incentives. It now pays for her to work up to an average of 21 hours per week, compared to just 15.5 under the current system.


Impact of proposed extension of Early Years Entitlement

Source: Resolution Foundation childcare cost model, 2012.

Notes: (1) The main earner works 37.5 hours per week. (2) Childcare usage: 1.2 hours of childcare is used for every hour worked by the second earner for 47 weeks of the year. (3) Childcare cost: £4.10 per hour for the one year old; £3.95 per hour for the four year old. (4) Main earner is on £20 per hour, earning £750 per week (£39.1k per year). The second earner earns half of this rate, £10 per hour. The couple represent a typical middle income household in that, if the second earner works 10 hours a week, gross household income is £44.3k, very close to the median of the equivalised gross household income distribution (£44.4k for a couple with two young children). (5) Final net family disposable income is calculated as gross earnings net of income tax, NICs and council tax, plus all tax credits, child benefit, housing benefit and council tax benefit received.