Many parents finding it doesn’t pay to work, says report

As the Government is reported to be planning benefits sanctions for part-time workers who don’t increase their hours, a new report outlines how England’s complex childcare support leaves many parents worse off if they work more hours.

Small child playing with brightly coloured bricks on the floor in a childcare setting


Tens of thousands of parents on low incomes face having to pay to return to work as childcare costs and the universal credit taper, alongside income taxes, can create an ‘effective marginal tax rate’ of over 100 per cent, according to a new report.

The report by the IPPR think tank says “the complex and incomplete patchwork of childcare entitlements, benefits and allowances for working parents in England” leaves many in a situtaiton where costs often outstripping their potential earnings, especially for those receiving universal credit.

It cites the example of a two-parent family with a one-year-old where a low-paid second earner whose partner is on minimum wage could face ‘effective marginal rates’ as high as 130 per cent, meaning the family would be substantially worse off if they increase their hours.

The IPPR says higher-earning families are also affected, for instance, the marginal rate for a couple where the person returning to work earns minimum wage and has typical childcare costs is 93 per cent.

The study comes amid reports that the Chancellor is to tighten benefit rules for part-time workers, requiring them to work longer hours or take steps to increase their earnings or face reductions in their benefits. It is expected that this will will come into effect from January and affect benefit claimants working up to 15 hours a week. The current threshold is rising from nine to 12 hours from next week.

The IPPR says there are seven different childcare support schemes that parents have to navigate on return to work. It highlights the lack of investment in childcare, meaning a mismatch between the money paid by the government for childcare and the amount it costs providers; the fact that ‘free’ hours only start from age three for most parents;  high upfront childcare costs, exacerbated by the childcare costs rebate offered through Universal Credit and administrative frictions between different support schemes on offer; and a lack of affordable, reliable wraparound care for children through primary school.

The report calls for a new childcare guarantee. It urges the government to:

  • Introduce 15 hours of free childcare for 48 weeks a year  for all pre-school age children, to close the gap between the end of parental leave and the start of free available hours.
  • Extend core free hours offer to 30 hours per week for all three and four year olds, throughout the year – including school holidays.  Currently it only covers 38 weeks of the year.
  • Expand wraparound care through schools to provide varied activities from 8am-6pm. This could include breakfast clubs, a safe place to study after school and links to wider family support services.
  • Invest significantly in childcare to expand supply and drive-up quality through a new funding settlement for funded hours, alongside a childcare workforce strategy underpinned by higher rates of pay and higher qualifications.
  • Introduce an Affordable Hours Scheme covering 60 or 95 per cent of costs for additional hours of care, depending on household income

Henry Parkes, IPPR senior economist and the report’s co-author, said:  “Childcare in England isn’t working – for children, parents or providers – while soaring inflation is only making a bad situation worse. Costs are already the second highest in the developed world as the average family have to pay over £7,000 a year for just part-time care for a child under two.

“On top of this, the current childcare system has now created an environment which disincentivises parents from work. In the midst of a cost-of-living crisis, it is nonsensical and impractical to have families who are worse off in employment. You should not be worse off from working more. The system needs change.”

Meanwhile, the Living Wage Foundation is calling on employers to pay workers the real living wage, calculated by the Resolution and Living Wage Commission and based on what people need to live on. Due to inflation, the UK living wage has risen to £10.90 per hour [£11.95 per hour in London], an increase of £1 and 90p per hour respectively.

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