Published on 27 Feb 2012 Sections

Nursery care costs rise as tax credits fall

A childcare charity’s survey finds childcare costs up almost six per cent, as it calls on the government to scrap changes to child tax credits which it says could push some families into poverty.

A child in a London nursery with Iain Duncan Smith and David Cameron in background (Getty)

The annual care costs survey from the childcare charity, the Daycare Trust, found nursery costs have risen by an inflation-busting six per cent for children under the age of two. For children aged two and over, costs have gone up by almost four per cent the survey found.

Added to the burden of rising costs, from 6 April 2012, working parents also face losing out on child tax credits – an often vital financial boost for those paying childcare fees.

New rules mean that one-child families with an income of over £26,000 face losing their tax credits completely, while families with two children will be allowed an income of around £32,200 before their child tax credits are cut. The current threshold is £41,300.

The latest HMRC figures reinforce Daycare Trust’s fear that the loss of this vital lifeline is forcing families out of work and in to poverty. Anand Shukla

The Daycare Trust says many families are now having to pay £100 per week for 25 hours of care for under-twos which is £4 per hour – the national minimum wage is currently £6.08 per hour.

Double whammy

In a further squeeze highlighted by Labour recently, more than 200,000 families will lose tax credits worth almost £4,000 a year unless they significantly increase their working hours. Currently the lowest amount of hours parents can work before they are eligible for working tax credits is 16, this will go up to 24 hours from April. This change is likely to raise family income, pushing it more towards the new maximum of £26,000/£32,200.

The most recent survey on childcare costs carried out by the OECD showed that Britain is the joint-fifth most expensive place for childcare in the OECD area. When subsidies and benefits are taken into account however, Britain becomes the second most expensive state for childcare after Ireland.

Read our guide to the changes in child benefit payments

The OECD says Britons in dual earner families pay 33 per cent of their household income in childcare costs – the EU average is 12 per cent.

‘Sheer folly’

Anand Shukla, chief executive of Daycare Trust said: “Daycare Trust warned that the government’s decision to cut tax credits would mean that some families found that they were no longer better off going to work once they had paid for childcare. The latest HMRC figures reinforce Daycare Trust’s fear that the loss of this vital lifeline is forcing families out of work and in to poverty.

“We are calling on the government to reverse its self-defeating childcare tax credit cut, and to deal decisively with the childcare affordability crisis for parents by pledging to provide free childcare for all two year-olds by the end of the current parliament.

“At a time when family and government finances are so stretched, and the Treasury is looking to maximise tax revenues and reduce benefit expenditure, it is sheer folly that any parent has to leave work because they cannot afford to pay for childcare.”

What help is available for childcare costs?

Tax credits
You do not have to have children to receive some tax credits but families can get help with childcare costs through them. Tax credits are made up of various ‘elements’ all of which you may or may not receive.
The maximum families can get annually = £545 (the basic or ‘family element’) + £2,555 (the child element, which is paid per child on top of the basic element).
If you or your partner work at least 16 hours per week, you may be entitled to working tax credits. The maximum annual amount you can claim = £1,920 (basic element) + £1,950 (Couples element – paid if you make a joint claim and in addition to the basic element) OR £1,950 (Lone parent element, paid on top of the basic element) In addition, if you work at least 30 hours per week, you may be entitled to an extra £790. There are additional amounts for parents with disabled children.
An additional element, the childcare element is available if you pay for registered childcare. This will help you with up to 70 per cent of the costs of childcare costing up to £175 per week with the maximum payout being £122.50 per week for one child or for two or more children, £210 per week for childcare costing £300 per week.
To claim this, both parents must be working at least 16 hours per week (from 06 April 2012 this will change and one parent must be working at least 24 hours per week).

* From 06 April 2012, the level of household income allowed before child tax credits are withdrawn will drop to £26,000 for one-child families, and around £32,200 for families with two children. You will also have to work at least 24 hours per week instead of 16 to be eligible.

Child benefit
Child benefit is paid to people who are responsible for a child and who pay towards the upkeep of children under 16 or under 20 and in approved education or training. Amounts are £20.30 per week for the eldest child and £13.40 for each subsequent child. From 2013, families with a higher rate taxpayer will have their child benefit clawed back through the tax system.

Employer supported childcare
Generally, if you receive less than £545 per year in tax credits, you may be better off using an employer scheme. You will generally not be able to benefit from both schemes as employer programmes are taken into account when calculating tax credits. Seek advice to be certain.
The benefit of employer-supported childcare is that you save money by not paying tax and national insurance contributions on some / all of the amount you receive for childcare and your employer saves by not paying national insurance contributions on the same amount. Each scheme is different so you should check which one your employer uses.

Free nursery places scheme
In England, all three and four-year olds are entitled to 570 hours of free childcare per year (around 15 hours of free childcare per week) with an approved provider, but not all providers are part of the scheme. The free hours are only available during term time. Your child will qualify for free provision in the first school term following their third birthday and the provision is not means-tested.

(Sources: HMRC, YouGov, Daycare Trust)

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