Poorest working families will miss out on £1,000 a year because of unbalanced childcare support

Poorer working families stand to miss out on as much as £1,000 a year because they are being excluded from a more generous package of childcare support being finalised by the government in the next few weeks.

New analysis from independent think tank the Resolution Foundation shows that, among those families who will qualify for universal credit, a household with two working parents will miss out on an extra £20 a week (equating to £1,000 a year) in childcare support if they do not both earn enough to pay income tax. The extra money will go to a family which is comparatively better off (though still on a modest income) if they are eligible for universal credit and all adults are earning enough to pay income tax.

The difference arises because the new higher level of childcare support – meeting 85 per cent of childcare costs – will only be available to households qualifying for universal credit where all adults earn enough to pay income tax. Households where at least one adult earns too little to pay income tax will continue to receive only 70 per cent of their childcare costs. They will not be any worse off than under the current system but nor will they receive any additional benefit from the government’s proposed £2 billion annual extra support for childcare. About 900,000 working families with children will be excluded from this more generous level of support in this way. Almost all of them will have at least one parent in low-paid, part-time work.

The government is about to close a consultation on the proposals – which were originally announced in the Budget of 2013 – and is expected to ratify them in this year’s Budget on 19 March. The proposals also include a tax free voucher worth up to £1,200 per child for better-off families (those in the top half of the income distribution and who do not qualify for Universal Credit) as long as neither parent earns more than £150,000 a year. This voucher system is due to be introduced from 2015 and the universal credit payment for childcare from 2016.

To illustrate the penalty faced by the least well-off families, the Resolution Foundation looks at the example of three different couples and the support they will receive under the new system. In each case, the main earner works full-time and the second earner for 18 hours a week. The family uses 22 hours of childcare a week for two children aged between two and four.

Family A – gross income £21,000 The main earner is paid £7.50 an hour and the second earner, a cleaner, the minimum wage of £6.31. They have a gross household income of £21,000 a year. They qualify for universal credit but because both are below the threshold for income tax, they receive only 70 per cent of their annual childcare cost of £6,800. This means they must pay £2,040 from their own pocket – which represents 7 per cent of their net income. (It would fall to 3.5 per cent of their net income if they received 85 per cent of childcare costs).

Family B – gross income £33,000 The main earner and the second earner, both teachers, are paid £11.50 an hour. They have a gross household income of £33,000 a year. The family qualifies for universal credit and both partners pay income tax. Under the new system they will receive 85 per cent of their annual childcare cost of £6,800. This leaves them to pay £1,020 a year from their own pocket – representing 6 per cent of their net income.

Family C – gross income £87,000 a year Both the main and the second earner are paid £30 an hour. They have a gross household income of £87,000 a year. Both pay income tax but they do not qualify for universal credit. They can claim up to 20 per cent of their childcare costs of £6,800 which leaves them to find £5,440 from their own pockets – which amounts to 9 per cent of their net income.

Not only does Family A spend a greater proportion of their net income on childcare than the Family B but the second earner’s incentive to work is much less for Family A.

Vidhya Alakeson, deputy chief executive of the Resolution Foundation, said:

“What should be a positive step towards more generous support for childcare is being undermined by a really poorly-designed policy which will overlook those who most need extra help.

“But this can still be fixed. With some relatively simple changes to the voucher system, such as reducing the level of income eligibility, it would be possible to extend the more generous level of childcare support to all working families who qualify for Universal Credit.

“It is the poorest working families who find the cost of childcare the biggest barrier to taking on more work – it can be an obstacle that prevents them earning their way up in life. For them, the extra help with the costs of childcare could be invaluable.”

ENDS

For more information contact:

Warwick Smith (head of communications) 020 3 372 2959 or 07443 042722 warwick.smith@resolutionfoundation.org

Vidhya Alakeson (deputy chief executive) 020 3372 2953 vidhya.alakeson@resolutionfoundation.org

Notes

The childcare cost used in the analysis is an estimated 2013-14 average for England.

Each family is assumed to use 21.6 hours of childcare a week for 47 weeks of the year and to take up their Early Years Entitlement.