Tax-free childcare: will parents be better off?

Published: 19th Mar 2013

Is this the most family-friendly government ever? David Cameron's 2010 pledge hasn't been forgotten, and the party seems to be keen to deliver.

What does the policy entail?

In the run up to tomorrow's Budget, the Treasury has announced that they will be contributing £1,200 yearly for every child to families where both parents are in work. This would also apply to single parents in work, and it should be fully implemented by 2014/15.

The move is designed to help families with the rising costs of childcare. It replaces Employer Supported Childcare (ESC) which will be closed to new applicants from autumn 2015, and which - according to the Treasury - was only offered by fewer than 5% of businesses.

According to the Treasury, the scheme will cost the Government £750 million in tax-free childcare and another £200 million for those on Universal Credit.

Is the Government really helping families?

The Government says that it already invests £5 billion a year in supporting parents with childcare and the Conservatives say the tax-free allowance will cover 20% of families' childcare bills. But is this enought? Not according to the Labour party.

Writing for the Labour Party website, the Shadow Education Secretary Stephen Twigg has claimed parents are actually losing out from the Government's policies:

"This announcement will not make up for the up to £1,500 that families on middle and low incomes have lost in cuts to childcare support — part of the £15 billion of cuts to support for children which will have been implemented before this announcement takes effect." [emphasis added]

The alleged £15 billion cut to "support for children" is also mentioned on another blog post authored by Yvette Cooper and Stephen Twigg and published last week. We contacted the Labour Party to ask for the source of this figure and were sent a House of Commons Library note which we've uploaded below. The note lists a series of cuts (for example, the Sure Start Maternity Grant, the 'toddler supplement' and the 'baby element' of Child Tax Credit) as well as changes in indexation to benefits and tax credits.

House of Commons Library Note on Cuts to Children's Benefits

Indeed, some of these cuts are a result of the Welfare Benefits Up-rating Bill. Benefits such as the Maternity Allowance, the Child Tax Credit and Statutory Maternity Pay (as well as others) haven't quite been cut; rather their annual uprating has been capped. This means they will rise by 1% rather than being in line with the Consumer Price Index (CPI) - the UK's official measure of inflation since 1997 - which is expected to rise by 2.2% in September 2013, and then to 2.6% in September 2014.

As the House of Commons Library also points out, the figures relating to this are estimates and should be handled with caution.

According to the Government's Impact Assessment, 4.4 million couples with children and 2 million single-parent families will be affected by the 1% cap.

Furthermore, some of the cuts listed above are a result of means-testing, which means starting from this year high-income families won't receive child benefits.

Do the gains outweight the cuts?

When Stephen Twigg says that families on middle and low incomes have lost £1,500 in cuts to childcare support, he's referring to Working Tax Credits which allowed parents to claim support for up to 80% of the costs of childcare, a figure which will fall to 70% in April this year.

Labour has pointed out that when the Government cut these credits in 2011, the average award fell by £570 a year - with some families losing up to £1,560 a year. That's because previously families could claim 80% of costs up to a level of £300 a week for a two-child family, or £175 for one child. When the Government cut this allowance to 70% this resulted in £210 for two children or £122.50 for one child: an average loss of £30 a week, equivalent to £1,560 a year.

Stephen Twigg makes the point that the new tax-free vouchers won't cover for these cuts. Is that a fair statement?

The two figures don't cancel each other out entirely. Whilst some families may have lost up to £1,500 yearly, 2.5 million families nation-wide will be receiving at least £1,200 yearly, a figure which doubles if they have two children.

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Flickr image courtesy of MIKI Yoshihito


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