UK Child Care Tax Scheme: Winners And Losers

By Kirk Eason

The government has unveiled a proposed expansion to the childcare tax credit scheme that would set up an online voucher exchange program worth up to £1,200, per child, to help fund childcare services for working families.  The potential law could have major ramifications for both working parents and those in the childcare industry.

The new law will be beneficial to care providers, as it is expected to lead to an overall increase in the number of children enrolled with various childcare services.

The proposal, expected to cost Her Majesty’s Treasury between £750 million and £1 billion per year, has come under some scrutiny for failing to provide benefits to single parents.

The proposal, which would be phased in by 2015, recently underwent a 12-week consultation phase (which ended October 14) where members of the public weighed in on the scheme, which could pay up to 20 per cent of working families’ childcare costs.

The proposal would end the current system which is funded by employers, which is inferior because only about 5% of employers participate.

The new scheme would seek to ease some of that burden on families where both parents work by covering 20% of the cost of childcare services, which is equivalent to the basic rate of tax.

Reasons for New Tax Scheme

The government says that the primary motivation for the update is to encourage people to re-enter the workforce, particularly those that may have been deterred from seeking employment because of the high costs of childcare.

UK’s comparatively high childcare costs (reportedly the highest in Western Europe) have proven to not only discourage parents from entering the workforce, but in some instances may even be driving them off the employment rolls.  It has been reported that the average mother in the UK is up to 20% less likely to work than women without children. Women with degrees from more prestigious universities are actually less likely to go back to work once they have children.

A study conducted by the government’s Childcare Commission revealed some alarming trends about childcare costs and their impact on the country’s workforce.  The study found that:

  • A third of UK parents have considered quitting their jobs because of childcare costs
  • More than one in ten has actually left a job because of worries that childcare had become cost-prohibitive.
  • One in five reported having turned down a job because the costs of childcare would put a huge dent in their take-home pay.

But as concerned as UK parents are about the costs of childcare, the survey found that few were willing to sacrifice the high quality of childcare services found throughout the country.  Only 5% of respondents said that they would be in favour of a reduction in the number of childcare staff nurseries, child minding providers and out-of-school clubs, even if those staffing reductions proved to substantially reduce the overall costs.

Tax Scheme Impact on Providers

The impact on childcare providers should be gradual and positive.  By 2015 the government plans to provide support for parents with children under 5, extended to children under 12 by 2020. With an estimated 2.5 million eligible families, this should lead to growth in the childcare industry and growth in the British workforce by freeing up skilled labour.

The purpose of the scheme is to encourage stay at home parents to re-enter the workforce. For this reason, only families in which both parents work are eligible for benefits, so people who provide childcare for their own families gain only the opportunity to stop doing that.

The government implemented grants earlier this year to help meet the expected rise in demand, by providing start-up money, lowering the barrier to entry for entrepreneurs in the childcare sector.

The UK childcare system should remain unchanged by these events, as a recent consultation proposing a larger ratio of children to nursery staff ended badly for the Conservatives. A backlash from parents forced the Liberal Democrats to withdraw support from the idea, which ended hopes of reducing the overall cost of childcare, and has forced the discussion more toward a redistribution of costs to ease the burden on families.

Despite the cost, only about 5% of British respondents in a recent poll said they would be willing to compromise the quality of the current system for the sake of cost.

Featured images: License: Creative Commons image source

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