Press Story

Low earners face effective tax rates up to 130 per cent to work more than 25 hours a week, IPPR finds
Combined childcare fees, taxes and benefit withdrawal can mean working longer hours costs parents more than they earn
Call for new ‘childcare guarantee’ for early years, as parents describe ‘complete nightmare’ of grappling with current system

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 by the IPPR think tank.

The complex and incomplete patchwork of childcare entitlements, benefits and allowances for working parents in England leaves many struggling in the face of spiralling childcare bills – with costs often outstripping potential earnings, especially for those receiving universal credit, the report says.

For example, in a two-parent family with a one-year-old, a low-paid second earner whose partner is on minimum wage could face ‘effective marginal rates’ as high as 130 per cent, meaning the household can become substantially worse off financially from increasing their hours (see note 6). Researchers argue that rising childcare costs as parents increase their hours amount to a tax on workers.

Steep childcare costs also pose a challenge to higher-earning families, with parents of young children returning to the workforce facing effective marginal tax rates as high as 93 per cent as they step up their hours, where the partner earns minimum wage and has typical childcare costs.

The report points out that there are seven different childcare support schemes that hard-pressed parents need to navigate as they attempt to juggle the demands of work and family, while also trying to make ends meet. Parents interviewed by researchers for the report described the system as a “minefield” and a “complete nightmare”, and one described feeling guilty for looking forward to her child growing older, when their financial situation would be made easier by access to funded childcare.

The report identifies four key challenges facing users of childcare:

A childcare market failing to deliver on quality or access. England’s childcare market is on the brink of collapse as government funding for free available hours fails to meet growing costs incurred by their providers. Too many families cannot access the childcare they need, while children in low-income households receive lower quality care than their better-off peers.
A gap in provision from the end of parental leave to the start of the free hours offer. Fully funded hours are only offered to three and four-year olds and some two-year olds, leaving a significant gap after the end of maternity or parental leave.
High up-front childcare costs and steep trade-offs for parents getting into or progressing in work. Parents returning to work or taking on more hours face high up front childcare costs, exacerbated by the childcare costs rebate offered through Universal Credit, and administrative frictions between different support schemes on offer. The staggeringly high effective marginal tax rates of up to 130 per cent leave some parents worse off for working longer, and disproportionately harms mothers’ earnings and economic security.
A lack of reliable wrap-around care for children through primary school. Access to breakfast and after school clubs is patchy and unreliable and childminders are often in short supply. Childcare costs through school holidays, which stretch far longer than most working parents’ leave allowances, are stretching families’ budgets beyond breaking point.

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 old's, throughout the year – including school holidays.
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

Rachel Statham, IPPR associate director and lead author of the report, said:

“Parents and carers are facing a complex, patchy and costly set of childcare offers. As the cost of living crisis pushes more families into financial stress, rising childcare costs are increasingly unaffordable - and risk pushing parents of young children out of the workforce altogether.

“We urgently need reform to simplify and expand childcare provision. It’s time for a childcare guarantee to lower barriers for parents getting back into or getting on in work, to reduce costs for families with children, and to ensure every child has access to high quality early years education.”

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.”

ENDS

Rachel Statham and Henry Parkes, the report’s authors, are available for interview

CONTACT

David Wastell, Director of News and Communications: 07921 403651 d.wastell@ippr.org

Liam Evans, Senior Digital and Media Officer: 07419 365 334 l.evans@ippr.org

NOTES TO EDITORS

The IPPR paper, Towards a childcare guarantee by Rachel Statham, Henry Parkes and Shreya Nanda will be published at 0001 on Thursday Sept 22. It will be available for download at: http://www.ippr.org/research/publications/towards-a-childcare-guarantee
Advance copies of the report are available under embargo on request
IPPR convened two focus groups involving 12 parents on universal credit, drawn from across England.
In the example family we assume the partner works 36 hours at the National Living Wage, and the second earner is paid £10.50 an hour. We assume childcare costs of £5.50/hour and that there is no access to free informal care. The marginal rate of 130 percent is reached when parents work 27 hours or more at which point increasing hours could lead the household to be worse off due to the combination of childcare costs, benefit withdrawal and income tax and national insurance.
IPPR is the UK’s pre-eminent progressive think tank. With more than 40 staff in offices in London, Manchester, Newcastle and Edinburgh, IPPR is Britain’s only national think tank with a truly national presence. www.ippr.org