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LITRG welcomes the announcement of two new initiatives for helping working parents with the cost of childcare, stressing the need for them to be developed in tandem to minimise complexity.

Introduction

The Government has announced that, from autumn 2015, it will phase in a new scheme under which the State will contribute 20% of the yearly childcare costs incurred by parents who are eligible – up to £6,000 per child. It is also proposed from April 2016 to extend childcare support under universal credit in order to improve work incentives for low to middle earners with children. According to the government announcement, this improved support through universal credit will be worth 85% of childcare costs where a lone parent or both parents in a couple pay income tax.

What the proposals involve

The first initiative operates via a state subsidy of up to 20% of eligible childcare costs. Thus, a family could receive up to £1,200 from the State annually for each child under the new scheme. To begin with, the scheme will be open to parents of children up to five years old, increasing over time to 12. To be eligible, all parents must be in work, with each parent earning less than £150,000 a year, and not already be receiving support for childcare costs through working tax credit or universal credit.

The new scheme will gradually replace the current system of employer supported childcare, although those already receiving support under the existing scheme can remain in it if they choose. The tax exemption for workplace nurseries will remain.

The other proposal operates through universal credit. From April 2016 childcare support will be extended under universal credit in order to improve work incentives for low to middle earners with children. According to the government announcement, this improved support through universal credit will be worth 85% of childcare costs where a lone parent or both parents in a couple pay income tax.

The detail of both schemes will be consulted on together. The consultation will also put forward proposals for employers to ‘continue to play a role in supporting their employees with childcare costs within the new scheme’.

LITRG reaction

The Group regards it as essential that the two new schemes are developed in tandem to ensure easy interactions between the two, and to keep complexity to a minimum. The wide reach of the proposals is welcomed. Many more families will benefit from the new schemes together than from the current combination of working tax credit and employer-provided tax and NI free childcare vouchers.

The Government’s intent to consult on both new schemes together is also welcome, and LITRG trusts that the interactions will be fully explored as a result of that process. A fundamental weakness of the present arrangements is that working parents have to carry out a complex calculation to see which of the two available means of support, through working tax credit or through employer-provided vouchers, works better for them. To ensure that the new schemes really do deliver effective work incentives, it is essential that complexity be kept to a minimum.