Child care reforms – the good news and the bad

19th March 2013

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Millions of families will qualify for help worth up to £1,200 a year per child with their care costs following the announcement of a ”better” childcare system writes Jill Insley.

The government intends to introduce a new voucher scheme enabling working parents – including the self employed – earning up to £150,000 each to claim back 20% or £1,200 of the first £6,000 of childcare costs – the amount the government says is the average annual price of a childcare place.

The system, which is going out to consultation, will initially apply to children up to five years old, but will be extended over time to include those up to the age of 12 years.

The new scheme is expected to benefit many more parents than the existing childcare voucher scheme – up to 2.5million once the age limit is extended to 12 – because it does not rely on employers to offer it. Instead they will open accounts to buy vouchers online.

This not only means that employees working for small companies which have not offered the employer-supported scheme will be able to sign up, but also the millions of self employed business people in the UK will be able to buy childcare vouchers for the first time.

Moreover the benefit is paid per child, instead of per parent like the existing scheme, enabling single parent families to benefit as much as those with two parents, and for families with more than two children to claim for every single child, regardless of how many they have.

Deputy Prime Minister, Nick Clegg said: ”The rising cost of childcare is one of the biggest challenges parents face and it means many mums and dads simply can’t afford to work. This not only hurts them financially, but is bad for the economy too. This announcement of a £1bn investment in childcare will make sure it pays to work.

“An extra £1,200 for each child will make a real difference to families who find themselves constantly worrying about how to juggle their family budget.”

The money could make the difference between a parent staying at home to look after the children and being able to afford childcare to return to work. The OECD suggests that mothers with children under 12 who want or are actively seeking a return to work have the potential to add over £4 billion per year to the economy.

A Department for Education survey data shows more than half of stay-at-home mothers would rather be in paid employment and nearly a quarter of employed mothers would increase their working hours if they could arrange good quality childcare which was convenient, reliable and affordable.

Drawbacks

Between 400,000 and 500,000 parents working for some 50,000 employers already buy childcare vouchers through the existing employer-supported scheme, according to the Childcare Voucher Providers Association. About 80 per cent are basic rate taxpayers, saving up to £933 a year in tax and national insurance per parent, and the rest higher and additional
rate payers saving £624 and £608 respectively.

Although the new scheme is expected to reach more families, there are catches which mean some families may not qualify.

Firstly, all parents within the family have to work: this means that single parents, and both parents in a couple, must be in employment to be entitled to buy vouchers. Under the existing scheme, only one parent of a couple need work to qualify. Only parents who are unable to work because they are disabled or a carer are likely to be exempted. Parents in receipt of tax credits or Universal Credit when it is introduced will not qualify.

Secondly, the vouchers can only be used to pay for childcare registered with Ofsted in England, and the equivalent bodies in Scotland, Wales and Northern Ireland. Some parents may also face the agonising choice between benefitting from extra cash in their pockets and retaining their non-Ofsted register child carer, who may be a friend or family member.

The scheme also runs for a shorter time period than the current scheme, which runs until the child reaches this or her 15th birthday (16 if they are disabled).

It will exclude very high net worth families, who have previously been eligible for tax and national insurance relief on their childcare vouchers. However only one per cent of those now buying vouchers pay the highest rate of tax.

The Treasury says the new offer will be worth more than double the amount of a single parent’s claim for the existing scheme.

But families with one child are better off under the old scheme: a basic rate tax paying couple can save almost £2,000 through the existing scheme and even additional tax rate payers would be £16 better off.

The old employer-supported voucher scheme will remain open indefinitely for existing members until their children reach the age of 15 – but only if they stay with the same employer. The old scheme will also accept new entrants until the new scheme is
implemented in the autumn of 2015. However this is only open to those employees whose companies offer the scheme – about five per cent of all employers.

Although help with childcare costs will eventually be phased out for 12 to 15 year olds, there will still be financial support for those whose children are disabled under the new scheme until they reach the age of 16.

Julian Foster, from the Childcare Voucher Providers Association, welcomed the announcement but added that parents need the support now, rather than in two and a half years’ time.

“[The government] has an opportunity to make some simple and immediate changes to the existing scheme, such as extending it to the self-employed and also improving employees’ access to the scheme through a right-to-request,” he said.

“In addition, they could increase the tax-free limits of vouchers from April this year to provide working parents with the immediate help they need to meet the rising costs of childcare.”

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