New childcare support is welcome but it’s skewed towards the affluent and misses out the poorest working families

Overall there are 2.6 million working families who will be eligible for new childcare support announced in the Budget. This extra money (just under £1bn) will bring real help to those families who take it up and is very welcome.

However, Resolution Foundation analysis published today shows for the first time how little this extra support will benefit the lowest-income working families. Only 160,000 families in the bottom 40 per cent of the income distribution will qualify for new help, compared to 1.7 million in the top 40 per cent by income.

This is explained by the two different types of childcare support which will be available.

First, families with both parents in work (or a single parent in work), who do not receive universal credit, will be eligible for a tax free childcare voucher. This will be worth 20 per cent of childcare costs up to £6,000 per child, meaning a maximum benefit of £1,200 per child. The voucher will be introduced for under-5s in 2015 before being extended to children under 12 by 2020. Once this rollout is complete, over 2 million working families will be eligible for the tax free childcare voucher.

As the chart below shows, these are mostly better off families. Families benefiting from the new tax relief are shown in green (those benefiting in the first wave, with a child under 5, are shown in light green and those benefiting later, with a child under 12 and over 5, are shown in dark green). Of those families who are eligible for the tax-free childcare voucher, 80 per cent are in the top 40 per cent of the income distribution. Almost no families (less than 1 per cent) in the bottom 40 per cent of the income distribution will be eligible for the vouchers.

Second, families who qualify for universal credit and in which all parents work and pay income tax will be eligible for extra support with their childcare costs. Rather than 70 per cent of costs (the current situation), they will now be able to claim 85 per cent of their childcare costs under Universal Credit. This is very welcome. Of the 1.5 million working families with children who are eligible for Universal Credit nearly 600,000 families will potentially benefit from this extra support – around 40 per cent.

However, over 900,000 working families with children who are eligible for Universal Credit – 60 per cent of the total – will be excluded from this extra support because they do not earn enough to pay income tax, usually because one or both parents is in low-paid, part-time work.  As the chart below shows, the families that are eligible for this additional support through Universal Credit are among the better off families on UC. This is because they are likely to work longer hours or earn a higher hourly wage.

Of those families who are eligible for additional support through Universal Credit, a quarter are in the top 40 per cent of the income distribution. Only 21 per cent of families who are eligible for this extra support through Universal Credit are in the bottom 40 per cent of the income distribution. The bulk of the families eligible for the new 85% rate of support will come from the middle 20% of the income distribution.

Finally, the Resolution Foundation analysis also shows that some of the 900,000 working families on Universal Credit who are excluded from the new more generous support will benefit from changes the government has made. Around 200,000 will receive significantly more help than they do today prior to the implementing of universal credit. This is because under today’s tax credit system it is not possible to claim childcare support while working under 16 hours a week. Under universal credit, these families will become eligible to claim 70% childcare support whilst working under 16 hours. (NB. this is a pre-existing feature of UC – and a positive aspect of the new system. It is not an announcement made in the Budget). In addition, some will benefit from the government’s extension of 15 hours a week of free childcare to 40 per cent of the most disadvantaged two year olds.

Vidhya Alakeson, deputy chief executive of the Resolution Foundation, said:

“This week the government announced new plans to reduce the burden of childcare costs on families. As part of that, it is very welcome that some families receiving Universal Credit will in the future see their childcare costs halved. But it is wrong for the new proposal to exclude many of the poorest working families who struggle greatly with the cost of childcare. As part of the government’s forthcoming consultation, it is crucial that additional support is made available to families where a parent is working part-time and not earning enough to pay income tax.”