The cost of childcare means work often doesn’t pay for middle and lower income families

High childcare costs mean that a woman working full-time could bring home as little as £4 a week in extra pay a new report from the Resolution Foundation shows.

In the most extreme case, a second earner working full-time at the minimum wage in a family where her partner is already working full-time at the same wage, would be left with just £211 (£4 a week) from her annual wage of £11,900 after the costs of caring for two children and the loss of tax credits which would be gradually withdrawn as the family’s income rose.

The study, Counting the Costs of Childcare, finds the effects of childcare costs can be just as dramatic in middle income households.

A family with two children earning £44,440 before tax and nominally £20,000 a year better off than a low income family of the same size, see this financial advantage almost wiped out by childcare and lost tax credits. While both families will pay £13,529 per year for full-time care for two children, the lower income family gets more than £11,000 in state support towards the cost.

So while the middle-earning couple’s income is initially 87 per cent higher, after taxes, benefits and childcare costs they are only 17 per cent better off, with a disposable income of £27,000 compared to £23,000 for the lower income family.

The disincentives to work which are built into the system of state support also mean that incomes can begin to fall as a working parent takes on more hours.  A second earner from a middle income household paid £12 an hour will add £4,500 to the family income if she works 13 hours a week. But if she works more hours, that amount starts to fall as the combination of childcare costs and withdrawn support bites into the family earnings.

The UK continues to have some of the most expensive childcare in the world (despite major investment since 2004) with a couple on double the average wage and two children in childcare spending 30 per cent of their disposable income on childcare. The last OECD average was 12 per cent.

The report points out that growing employment among women has been a critical factor in holding up household living standards over the last 30 years as men’s employment income has declined. It says that affordable childcare can therefore be an essential tool in lifting incomes for those in the bottom half of earnings.

The report concludes that it makes little sense to invest more in the current means-tested tax and benefit system on childcare because of the strong incentives against work that are built into it. Instead, the report says extra resources should be spent on a simpler system of highly affordable non-means tested support.

Vidhya Alakeson, deputy chief executive of the Resolution Foundation and joint author of the report, said:   “Despite progress over the last decade the cost of childcare in the UK still eats up a very large slice of family incomes. It’s hardly worth a typical second earner going out to work more than a couple of days a week  because the family will be barely better off as the extra money is swallowed up by the costs of childcare.

“This is a serious concern because increasing the level of female employment is one of the key routes through which family living standards have increased. We need major change in our childcare system to ensure that work is always worthwhile – and that working more hours or a pay rise results in higher take home pay.”

Notes to editors

1. Counting the Costs of Childcare by Vidhya Alakeson and Alex Hurrell is published by the Resolution Foundation www.resolutionfoundation.org
2. Figures for a second earner in a middle income household on £12 an hour assume a main earner in the household on £18 an hour.
3. The most recent average of proportionate childcare costs in OECD countries is from 2008. At that time, the UK proportion of income spent on childcare was 27 per cent for a couple on 200 per cent of an average wage and 21 per cent for a couple on 150 per cent of the average.   Currently Resolution Foundation calculates these figures stand at 30 per cent and 19 per cent respectively.