Childcare changes – managing the most expensive years of your life

British childcare costs are the third highest in the world, with the average cost of a year of nursery now nearly £15,0001.

With studies suggesting that these costs are preventing mothers, in particular, from returning to the workforce, new changes announced in the Budget this year are aimed at making childcare more affordable.

But while the government claims that the change amounts to a “childcare revolution”, many people will have to wait to see the cost of their childcare reduce.

What is the system today?

There is already some help available for those needing childcare, but most parents must wait for it until their child turns three.

Once children are aged three, many are eligible for 30 hours a week of free childcare and all are eligible for some free hours. Those parents who work more than 16 hours a week and earn less than £100,000 (per person) are entitled to 30 hours. Those who earn more, or do not hit the working hours requirements are entitled to 15 hours free.

The free hours are a significant saving for parents, but most must top up. For a start, the government only funds 30 hours a day for 38 weeks a year, which is the equivalent of the school term times, so most people who want fulltime childcare, end up paying for top ups. Nurseries and childcare settings can also charge for lunches and nappies.

Some children are eligible for free childcare from the age of two if they have specific needs or parents are on certain benefits. However, most parents find that they are paying an eyewatering bill for childcare until their child reaches three, despite other sources of funding such as Tax-Free Childcare and some childcare help through benefits being available too.

What is changing?

Rishi Sunak announced that he wanted the free hours for childcare to kick in sooner, to make childcare more affordable for parents. However, this will not happen immediately, so those with children who are already in childcare may not see the benefit.

April 2024 will see working parents of two-year-olds able to access 15 hours of childcare from April 2024.

All eligible parents of children aged between nine months and two years old will be able to access 15 hours of childcare by September 2024. Parents of children between nine months and three years will be able to access 30 hours of childcare by September 2025.

To be eligible, a single parent must earn more than £8,670 but less than £100,000 adjusted net income per year. If a child lives with two parents, the same stipulation must apply to each of them.

Why is it taking so long?

Funding more childcare is expensive and the Government says it will take a long time to prepare for extra demand for childcare providers. The childcare website from the government says that the staggered approach “will give childminders and nurseries time to prepare for the changes, ensuring there are enough places ready to meet demand”.

The government has also decided to introduce bonuses for new childminders to improve the number of places available.

What about if I earn more than £100,000?

The entitlement to 30 hours free childcare is removed when a parent’s income rises over £100,000, meaning that parents of young children could be worse off if they earn more.

The Government changes create what thinktank the Institute of Fiscal Studies calls a “massive distortion” for working families, meaning that their disposable income could drop dramatically if a parent’s salary rises above £100,000.

Its calculations show that a parent with two children under three would find their disposable income dropped by £14,500 if their pre-tax pay crosses the £100,000 threshold. A parent earning £130,000 would be worse off than one earning £90,000 in this situation, according to the IFS2.

There is a solution to this, however. Parents who cross this threshold can keep their pre-tax income down by making extra pension contributions for the future. If they are still in the Childcare vouchers scheme, which is a salary sacrifice arrangement, they can also use this to take down their income, although these schemes are closed to new applicants. You can also use charitable giving to reduce your salary for this purpose.

Is there any other help for those struggling with the cost of childcare?

Yes. The tax-free childcare scheme allows you to receive up to £2000 a year per child back on the cost of childcare for children under 12. For every £8 you pay into your government account, the government will pay in £2 to use to pay a registered childcare provider.

There are more details on this scheme on the government website, here. This scheme is also closed to those earning over £100,000, so it is similarly useful to make pension contributions to reduce your salary if you want to use the scheme.

This scheme has more money available (up to £4,000 per child) for those with a disabled child but cannot be used if you are claiming many other benefits. You cannot get Tax-Free Childcare at the same time as claiming Working Tax Credit, Child Tax Credit, Universal Credit. These benefits are other ways to get help with childcare if you are on a low income.

Finally, those who already signed up to an employer’s childcare voucher scheme can use this scheme to pay for a certain amount of childcare free from income tax or national insurance. Basic rate taxpayers can receive £243 of childcare vouchers a month, saving over £900 a year. These can be used in conjunction with the free hours to further cut costs.

9 May 2023