Childcare tax breaks risk helping the rich the most

At present, there are almost no voucher recipients among the poorest 40 per cent of households.

In the week that parents earning over £50,000 saw their child benefit cut, the speculation is that the government intends to introduce tax relief for childcare, possibly making those who were worse off from the child benefit change, better off once again. In the absence of an announcement from ministers, we will not know what the government actually intends to do until next week’s announcement. But the talk is of the introduction of basic rate tax relief for childcare worth £2,000 a year per child. How the scheme will work is anyone's guess but, even without the details, we can already speculate that this is a policy that is likely to help the better off more than the ‘strivers’ the government says it supports.

The government already spends £700m a year on tax relief for childcare through employer supported childcare vouchers which look likely to be scrapped following the introduction of tax relief. It’s a voluntary scheme that employers can offer which gives their employees basic rate tax relief on £55 a week of childcare costs (less if they are a higher rate taxpayer). Resolution Foundation analysis shows that 50 per cent of people who used vouchers in 2010-11 were in the top 20 per cent of households (see graph). Almost no voucher recipients were found among the poorest 40 per cent of households.

Position of childcare voucher recipient households in the income distribution, 2010-11

At the moment, whether or not you can benefit from vouchers depends on whether your employer offers them. In this respect, the government’s proposal could be an improvement if it is available to all. But assuming it works in a similar way to the existing vouchers, it is likely to be of little benefit to low paid working families who struggle most with the costs of childcare. Under the current scheme, those who do not earn enough to pay tax cannot benefit at all and those who qualify for tax credits are only marginally better off if they also take up vouchers. The argument may be that tax credits are there for those on low income and tax relief is there to help the rest. But let’s be clear that the government may be about to make a major investment in childcare that barely benefits low income working families, while offering help to the richest.

Other choices would have been possible. The Resolution Foundation’s Commission on Living Standards recommended an extension of the universal entitlement to childcare for three and four year olds from 15 hours a week for 38 weeks a year to 25 hours a week for 47 weeks a year. This would make it easier for more mums to work part-time than the current childcare entitlement which is what most say they would like to do. The extension would have benefited all families with young children, including the better off, but importantly would have also helped the least well off.

Among the details of the government’s proposals that will be made clear next week is how the scheme will be administered. There seem to be three choices. The government could extend the current employer scheme but make it compulsory for employers to take part. This seems unlikely given prior commitments to cut red tape. Tax relief could be claimed by individuals through the self assessment process but this also seems unlikely given criticisms about a similar approach introduced to deal with the messy child benefit change. The third option is to force providers to administer it and claim tax relief on behalf of parents. If this is the preferred option, the government will need to ensure that the extra money is passed onto parents in lower fees. Otherwise, this could end up being a subsidy to struggling providers rather than a benefit to squeezed parents.

David Cameron during a visit to a London Early Years Foundation nursery in London. Photograph: Getty Images.

Vidhya Alakeson is deputy chief executive of the Resolution Foundation

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How can London’s mothers escape the poverty trap?

Despite its booming jobs market, London’s poverty rate is high. What can be done about it?

Why are mothers in London less likely to work than their counterparts across the country, and how can we ensure that having more parents in jobs brings the capital’s high child poverty rates down?

The answers to these two questions, examined in a new CPAG report on parental employment in the capital, may become increasingly nationally significant as policymakers look to ensure jobs growth doesn’t stall and that a job becomes a more much reliable route out of poverty than it is currently – 64 per cent of poor children live in working families.

The choice any parent makes when balancing work and family life is deeply personal.  It’s a choice driven by a wide range of factors but principally by what parents, with their unique viewpoint, regard as best for their families. The man in Whitehall doesn’t know best.

But the personal is also political. Every one of these personal choices is shaped, limited or encouraged by an external context.   Are there suitable jobs out there? Is there childcare available that is affordable and will work for their child(ren)? And what will be the financial gains from working?

In London, 40 per cent of mothers in couples are not working. In the rest of the country, the figure is much lower – 27 per cent. While employment rates amongst lone parents in London have significantly increased in recent years, the proportion of mothers in couples out of work remains stuck at about 12 percentage points higher than the rest of the UK.

The benefits system has played a part in increasing London’s lone parent employment rate. More and more lone parents are expected to seek work. In 2008, there was no obligation on single parents to start looking for work until their youngest child turned 16. Now they need to start looking when their youngest is five (the Welfare Reform and Work Bill would reduce this down to three). But the more stringent “conditionality” regime, while significant, doesn’t wholly explain the higher employment rate. For example, we know more lone parents with much younger children have also moved into jobs.  It also raises the question of what sacrifices families have had to make to meet the new conditionality.  

Mothers in couples in London, who are not mandated to work, have not entered work to the same level as lone parents. So, what is it about the context in London that makes it less likely for mothers in couples to work? Here are four reasons highlighted in our report for policymakers to consider:

1. The higher cost of working in London is likely to play a significant role in this. London parents are much less likely to be able to call on informal (cheaper or free) childcare from family and friends than other parts in the country: only one in nine children in London receives informal childcare compared to an average of one in three for England. And London childcare costs for under 5s dwarf those in the rest of the country, so for many parents support available through tax credits is inadequate.

2. Add to this high housing and transport costs, and parents are left facing a toxic combination of high costs that can mean they see less financial rewards from their work than parents in other parts of the country.

3. Effective employment support can enable parents to enter work, particularly those who might have taken a break from employment while raising children. But whilst workless lone parents and workless couples are be able to access statutory employment support, if you have a working partner, but don’t work yourself, or if you are working on a low wage and want to progress, there is no statutory support available.

4. The nature of the jobs market in London may also be locking mums out. The number of part time jobs in the capital is increasing, but these jobs don’t attract the same London premium as full time work.  That may be partly why London mums who work are more likely to work full time than working mums in other parts of the country. But this leaves London families facing even higher childcare costs.

Parental employment is a thorny issue. Parenting is a 24-hour job in itself which must be balanced with any additional employment and parents’ individual choices should be at the forefront of this debate. Policy must focus on creating the context that enables parents to make positive choices about employment. That means being able to access the right support to help with looking for work, creating a jobs market that works for families, and childcare options that support child development and enable parents to see financial gains from working.

When it comes to helping parents move into jobs they can raise a family on, getting it right for London, may also go a long way to getting it right for the rest of the country.