Means testing approach to childcare costs ‘doesn’t work’

High childcare costs mean that a woman working full-time could bring home as little as £4 a week in extra pay, according to a report by the Resolution Foundation.

The Counting the Costs of Childcare report says that 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annual wage of £11,900 after the costs of caring for two children and the loss of tax credits which would be gradually withdrawn as the family’s income rose.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 report says the affordability of childcare has improved in the last few years, but progress on affordability has slowed since 2011 when the Government reduced the amount parents could claim back for childcare costs through Working Tax Credit.

It adds that families at different points in the income distribution face very different childcare costs. For dual earning families, childcare costs bite hardest for middle income couples. A middle income couple with a gross income that is 87 percent higher than a minimum wage earning couple (£44,440 compared to £23,790) ends up only 17 percent better off than the minimum wage couple after taxes, benefits and childcare costs. After paying for full time childcare, the middle income family’s disposable income is £26,669 compared to £22,742 for the low income family.

For single parents, a middle income parent working full time receives more support towards childcare costs than a middle income couple family where both parents work full time. The report says higher income single parents, however, receive no support for childcare costs except the early years entitlement of 15 hours of free childcare per week for three and four year olds. It states: “As a result, childcare costs continue to act as a real barrier to work for single parents even at the higher end of the income distribution.”

The report adds that the withdrawal of benefits and tax credits as income increases means that it is possible for childcare costs to account for a very small percentage of disposable family income but still have a significant negative impact on work incentives.

In a minimum wage earning couple, it states, the second earner pays to work for the first 16 hours because the family is not eligible for childcare support (although this will change with the introduction of Universal Credit). For each additional pound the second earner earns after 16 hours, the family loses almost the same again, leaving the family’s disposable income flat, says the report. “The family is almost no better off if the second earner works full time or not at all,” it states.

It outlines how a second earner earning £12 an hour in a middle income household faces a positive incentive to work for the first 13 hours. It says: “By working up to 13 hours, she can increase her family income by just over £4,500 a year. However, after this point, her incentives turn negative because childcare costs start to eat up a large share of her additional earnings, leaving the family no better off as she extends her hours.”

The report says reducing childcare costs is “an important part of lowering the barriers to work for women”, but it believes means testing is not the way forward to increase work incentives.

It says: “Greater investment in today’s means tested system is unlikely to significantly improve work incentives. Given the high marginal deduction rates already faced by low to middle income families through the tax and benefit system, providing further means tested support will only eat up more of each pound earned. When new money is available, there is, therefore, a strong case for it being invested in highly affordable, non-means-tested support for childcare rather than investing more in today’s complex system.”

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