Tax-free childcare - what's in it for low-income families?
By Mark Willis, Welfare Rights Adviser at CPAG in Scotland
The government has been busy promoting its new tax-free childcare scheme, with its own Twitter hashtag, infographics on Flickr, and even a Facebook photo album. These proudly boast that a working family with two children can save up to £4,000 a year. The ‘top ten things to know about tax-free childcare’ announces the scheme will be simpler, fairer, and available to families earning over £52 a week and not more than £150,000 per year. However, low income families need to know that tax-free childcare offers them nothing - and could even leave them significantly worse off if they apply for it.
Tax-Free Childcare is due to be introduced in autumn 2015 (UPDATE: delayed until 'early 2017'). Although it claims to offer support to those who have previously been left out, the design of the new scheme runs a risk of lower-income families losing all existing help, and leaves some working parents on low incomes still effectively excluded from any help with childcare. This is because applying for the scheme will automatically terminate a family’s tax credits or universal credit – you can’t get both at once.
For example, a lone parent with two children, working 15 hours a week, earning £10,000 a year, with childcare costs of £2,600 a year, is currently entitled to approximately £6,105 child tax credit a year. She would get this for her children even if she was not working, but because she is not doing enough hours, cannot get any further help from the working tax credit or the childcare element. She does not meet the Gateway conditions for universal credit in the current stage of introduction, so cannot claim the potentially more generous help available through that. If she applies for tax-free childcare, she will be able to get £520 from the government to top up payments of £2,080 that she makes from her wages into a childcare account to cover her annual childcare costs. But she would stand to lose all her £6,105 child tax credit. She should be warned of this risk before claiming, and she should be able to switch back, but this is likely to cause a gap or delays in payments at the very least.
A similar situation would affect working couples, if they are not both working at least 16 hours a week (unless one is sick, disabled or a carer).
So, if it doesn’t help these families, who does it help?
The answer to this question may surprise anyone persuaded by the Government’s argument that austerity means the state can no longer provide tax credits and child benefit for families with above average incomes.
All families on a joint income of up £50,000 used to receive the family element of child tax credit, £545 a year, with families on up to £60,000 receiving some help. Over a million families have now lost this payment, which was itself introduced to replace a ‘children’s tax credit’ income tax relief.
Child benefit used to be a simple, universal payment, usually going to the mother and spent on the children. Now families with an individual earner on more than £50,000 have to repay some, and those on over £60,000 have to repay all child benefit, via the complex child benefit charge.
So it may be surprising to hear that tax-free childcare payments will be available to couples earning up to £150,000 each, i.e. potentially a joint income under £300,000 a year.
The nearly £1bn the scheme costs could have been better spent on moving towards a more universal, supply-side childcare model. It could have been used to expand the free entitlement and to develop after-school and holiday provision that is free or low cost at the point of use; crucially it could also have invested in quality improvements. And it could have been used to align the childcare support available in tax credits with universal credit, to allow 85% childcare costs for any hours worked, rather than leaving us with a two-tier system over several years.
For low-income parents, childcare can make the difference between being able to work or not. And how much parents can work makes a big difference to poverty rates. Sadly, Tax-Free Childcare is a policy which helps those on higher incomes rather than those who most need help.