Families to pay more for childcare, despite tax relief plan

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New analysis from IPPR shows lack of price control will erode tax-free savings

Many families will have to spend more of their disposable income on childcare under Government plans, according to new analysis from the think tank IPPR.

From 2015, the Government plan an expanded tax-free scheme that ultimately would be worth up to £1,200 per child, saving a typical working family with two children under 12 up to £2,400 a year. This will cost the Government £550m and 80 per cent of families likely to benefit are in the top-half of working-age households income distribution.

IPPR’s new analysis shows:

  • In today’s prices, the net cost of childcare for a family with two children aged 2 and 4 in full-time care is £10,970. This is after accounting for 15 hours free for 38 weeks and the extra support offered via vouchers (worth £1,870 a year).
  • If both parents were working full-time at median weekly earnings, we would expect their joint disposable income to be £43,110. This includes their post-tax earnings, the amount they receive in child benefit, and the amount they spend on childcare vouchers before tax less the £1,870 they save in tax and NI. This means they spend 25.4% of their disposable income on child care.
  • Up-rating to 2018 childcare prices using the Day Care trust averages of price inflation since 2008, incomes using the OBR forecasts for earnings growth, and all the other figures using CPI, and incorporating the £2,550 this family would get as a benefit through tax-free childcare if the eligible amount is up-rated each year, the amount they spend on childcare rises to £12,610 in today’s prices, or 27.8% of disposable income.

 

Dalia Ben-Galim, Associate Director at IPPR, said:

“With childcare costs still running way above inflation, it is possible that the Chancellor will announce further action to help parents with the high cost of childcare. But tax-free childcare on its own will not make childcare more affordable for families. The Government has not got a plan to regulate the market, nor control prices, which makes pumping tax relief into the system a short-term fix with long-term price rise consequences.

“A more radical reforming approach to childcare costs is needed. Direct childcare provision or direct payments to childcare providers would be more effective at achieving lower childcare costs and would be more effective at driving up quality provision.”

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