Counting the Costs of Childcare

Published on Tax and Welfare

Counting the Costs of Childcare finds that high childcare costs mean that a woman working full-time could bring home as little as £4 a week in extra pay. In the most extreme case, a second earner working full-time at the minimum wage in a family where her partner is already working full-time at the same wage, would be left with just £211 (£4 a week) from her annual wage of £11,900 after the costs of caring for two children and the loss of tax credits which would be gradually withdrawn as the family’s income rose.

  • As a result of significant investment over the last decade, the affordability of childcare as a percentage of disposable family income has improved for most families, although costs remain among the highest in the OECD. In 2012, a couple earning 150 percent of the average wage between them with a two and a three year old in full time childcare, spent 19 percent of their disposable income on childcare, compared to 21 percent in 2008 and more than 30 per cent in 2004.
  • However, progress on affordability has slowed since April 2011 when the government reduced the percentage of childcare costs that can be covered by the childcare element of Working Tax Credit from 80 percent to 70 percent. If not for the cut, the couple on 150 percent of average wage would be spending less than 15 percent of its disposable income on childcare.
  • Given the mix of universal and means tested support available for childcare, families at different points in the income distribution face very different childcare costs. For dual earning families, childcare costs bite hardest for middle income couples.

  • Reducing the amount of disposable income ordinary working families spend on childcare is an important part of lowering the barriers to work for women. Lower costs reduce the extent to which paying for childcare compounds the disincentives to earn than are already built into the tax and benefit system.
  • However, greater investment in today’s means tested system is unlikely to significantly improve work incentives. Given the high marginal deduction rates already faced by low to middle income families through the tax and benefit system, providing further means tested support will only eat up more of each pound earned. When new money is available, there is, therefore, a strong case for it being invested in highly affordable, non-means-tested support for childcare rather than investing more in today’s complex system.