A few thoughts on the Government’s tax-free childcare scheme

August 9, 2013

This week, the Government launched its consultation on a tax-free childcare scheme, eligible to families with both parents in work and some carers. The scheme has ignited a row over the role of stay-at-home mothers, with some claiming that the scheme penalizes them for choosing to stay at home to look after their children. The Government, however, has responded that stay-at-home mothers are making a lifestyle choice and this scheme is specifically for childcare.

Whatever your position in this debate, this argument has rather eclipsed other more important policy questions that need to be highlighted in the consultation. First, as parents can claim back 20% of whatever is spent, up to a maximum of £1,200 per child, what this means in practice is that the weighting of the distribution will favour wealthier people. The DfE’s own survey shows that average spending is £2,236 in deprived areas and £2,860 in wealthier areas.

Secondly, for families who earn under £10,000 and are therefore not eligible for the proposed increase in working tax credits (which currently cover up to 70% of childcare costs, increasing to 85% under universal credit for those above the personal tax threshold) the problem is that they are not eligible for this tax-free childcare scheme either. It would be interesting to understand the reasons for their exclusion. As Policy Exchange has previously argued in our Quality Childcare report, there needs to be a mechanism such as budgeting loans to enable low-income parents to pay the deposit for a nursery place so that they can access additional hours on top of their 15 free hours entitlement. If these hidden barriers combined with delays in reimbursement are not addressed, there will remain exists a disincentive to return to work for the lowest income families.

Nevertheless, despite these two important concerns, Policy Exchange supports the introduction of greater support for all working parents. However, the level of the cap, currently proposed to be set at £150,000, also needs to be carefully considered. What this would mean if implemented is that two parents earning £290,000 would receive the same tax free allowance as a low income couple. We calculated in Quality Childcare that removing the allowance for those earning over £150,000 would have saved the government £20 million in 2011-12. One possible alternative future step would be to lower the cap when there are more details on how the system will be administered. The introduction of this tax-free childcare scheme is, though, good news for the self-employed, who will now be eligible for support for childcare costs, whereas childcare vouchers were only a perk for those working in 5% of the UK’s companies.

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