Today, the government announced a new scheme for tax-free childcare for working families.
To be phased in from Autumn 2015, it will apply to parents earning £150,000 a year or less, and offers one-fifth of their annual childcare costs.
In total, it will pay up to £1,200 per child, for children up to 12.
The government says that in the first year, when it only applies to children aged five and under, it will help 1.3m families, and once it applies to 5 to 12-year-olds as well, it will help 2.5m families.
But given it’s scrapping an existing scheme to make way for this one, and it’s scrapping child benefit for many families, are working parents really in a position to celebrate?
How is this different to the existing voucher scheme?
At the moment, a parent who is employed can claim for a voucher for childcare. For a basic-rate taxpayer, this can be worth up to £930 a year, per person. If both parents claim it, they’re eligible to claim £1,800 a year. It’s a flat rate regardless of how many children there are.
Under the new scheme, parents will claim per child – 20 per cent of their childcare costs, up to a total value of £1,200.
But it’s only for households where both parents work. A household in which one parent works and the other won’t get it.
Single parents can claim it, but only if they work.
And it’s also capped at earnings of £150,000 each a year.
Who wins and who loses from this scheme?
No-one wins from the new scheme before 2015, but after that, parents with children under five only, for the first year.
It’s also worse for a family of two working parents and one child. Under the existing scheme, they could get £1,800 a year, but that will drop to £1,200 a year.
Under the new scheme, you can also claim a maximum of a fifth of your childcare costs. Currently, if a couple are entitled to £1,800 a year, if that money covered all of their childcare (unlikely, but it is a possibility), then it’s effectively free.
Especially if their children are between the ages of 12 to 16, under the new scheme the benefits stop at 12 rather than 16, unless a child is disabled. So parents of teenagers are no longer entitled.
Single working parents with a number of children are expected to benefit, as they’ll be paid per child instead of per parent.
The government says that the existing employer supported childcare scheme is offered by less than 5 per cent of employers and has a take up of 450,000 families.
It expects up to 2.5m families to benefit from the scheme once it’s fully operational – i.e. it applies to all children under-12.
How much will it cost?
The Treasury thinks that by the time it’s fully up and running, it will cost £1.4bn a year.
It will be paid for with the £600m from the existing voucher scheme, and an extra £750m a year.
On top of that, the government has also said that it will increase contributions towards childcare for low income parents.
Parents who get childcare contributions through the working tax credit are currently offered 70 per cent of their childcare costs, but that will go up to 85 per cent. The increase applies even after it becomes the universal credit.
So how do we pay for it?
We don’t know, and there’s no answer from the Treasury either. They’re not saying, at this stage. This is an announcement which is being made a day before the budget, and they’re simply saying that further details will be announced then.
Isn’t this a drop in the ocean compared to the way they’ve taken away child benefit?
The government introduced changes to child benefit because it wanted to save £1.5bn a year.
They save a bit more each year due to the fiscal drag, which is where a combination of inflation and a growth of earnings pushes more taxpayers into higher tax brackets.
On top of that, the government expects to save the following amounts by a freeze on child benefit:
So overall, is the government saving or spending when it comes to children?
There are a number of schemes for children, so this is by no means an exhaustive account.
But of the biggest elements – child benefit and childcare – this is where we would stand on a profit and loss account.
For 2012-13, the government saved £1.1bn in child benefits through the freeze and the cap. That year, “employer supported childcare” – i.e. vouchers and workplace nurseries – cost around £820m.
The government also points out that it extended early years education for three- and four-year-olds, though it was an extension proposed by the previous Labour government and kept on under the coalition.
In September 2010, three- and four-year-olds got 15 hours a week free at nursery, where they used to get 12.5 hours a week.
Although the total cost is £1.9bn a year, according to the National Audit Office, the Department for Education said that the extension itself – the extra 2.5 hours a week – cost £340m.
Is it enough?
It will help, but some childcare organisations suggest it’s not enough.
Harriet Waldegrave, education research fellow at the think tank Policy Exchange, said: “Low-income working families will see their childcare costs halved thanks to today’s announcement. This will be a huge help to those on the tightest budgets, and may free them up to choose care based on what they think is best for their child rather than what is cheapest.”
This is what Jill Rutter, research manager at the Daycare Trust and the Family and Parenting Institute, said: “Today’s ministerial statement only provides the broadest of outlines, and more detail will emerge over the next few months.
“If there is a catch it is that the announcement is not the root and branch reform of childcare that we need in the UK, to ensure that we have the most cost-effective system of subsidising childcare.”