Upfront for families? Childcare costs in universal credit

Published on: 
29 October 2019
Written by: 

Tom Lee

Senior policy analyst

For many families upfront childcare costs are a significant barrier to work. Under tax credits, parents can get financial support for upfront childcare costs. However, under universal credit any help with childcare is paid retrospectively. This is a big problem as the majority of childcare requires parents to pay for a month/term in advance. Over three-quarters of families in poverty have no savings making them unable to pay for childcare. CPAG’s Early Warning System has received multiple accounts of parents who would like to work more but are unable to do so because of childcare costs. One of universal credit’s key aims is getting people into work, and this year (former) Secretary of State Amber Rudd announced that she would be promoting two ways to help parents with upfront childcare costs – the Flexible Support Fund (FSF), for those starting a new job who have to pay for childcare before receiving their first wage, and budgeting advances, for those who need further help with paying for upfront childcare costs. This blog considers whether these two mechanisms are adequate to meet parents’ needs.

The FSF is a discretionary payment, allocated by job centre work coaches, which can be used to help parents with childcare and other costs associated with getting into work, such as uniforms and training. It does not have to be paid back. The FSF has not been widely used to help with childcare costs to date and many parents are unaware of its existence. In 2016/17 FSF childcare expenditure was only £1.2m, out of a total spend of £51m. This year the FSF’s budget is £41m, a £10m fall from 2016/17. It is unclear how much will be spent on childcare but there have been recent efforts to promote it following the Secretary of State’s announcement. If these are successful, will the budget go far enough?

It is difficult to know how many parents are unable to work because of the problem of upfront childcare costs. However, we can get a sense of the scale by analysing available data. Nearly 75,000 parents (8% of total people currently on universal credit) are estimated to be “looking for work” and have a child aged 14 or under. This number is only going to increase as millions more people migrate over to universal credit.

Even if we just focus on the 75,000 parents currently on universal credit looking for work, the FSF seems ill-equipped to deal with their upfront childcare costs. Childcare in the UK is internationally very expensive. A parent with a two year old working full-time may have to pay over £1,000 for one month’s childcare. Some of the parents in CPAG’s Early Warning System have reported having to find £1,500 to meet upfront childcare costs. Even if we are conservative in our estimates and assume that these 75,000 parents only need £600 each, this still totals up to £45m, more than the entire FSF budget. It is also worth pointing out that if FSF expenditure on upfront childcare costs increases, expenditure will have to be cut elsewhere.

Once parents have received their first wage, the government recommends using budgeting advances (interest free loans) instead of the FSF. Claimants receive an upfront lump-sum payment which is then paid back in the form of lower universal credit payments over the following year. Advances can be taken out to cover costs needed to help get a job or stay in work, as well as for emergency household costs. They could also help parents increase their hours by covering an increase in childcare costs. However, the eligibility criteria mean that the vast majority of families will not qualify for budgeting advances. To qualify for a budgeting advance as a couple, family earnings must be below £3,600 over the past six months. This is going to basically exclude all second-earners (someone working full-time at minimum wage would earn £8,000 over six months). For lone parents the threshold is even lower at £2,500 over the past 6 months. This means a lone parent who has worked 16 hours a week at minimum wage for the past 6 months will be ineligible for a budgeting advance, even if they want to increase their hours. Similarly, anyone who has worked full time at minimum wage for two of the past six months is not going to qualify. This means that the vast majority of families are going to exceed the earnings thresholds. It is unclear why the thresholds are so low, especially when claimants have to pay back the advance.

Both budgeting advances and the FSF are ill-equipped to deal with the issue of upfront childcare costs. The FSF is underfunded and only available to out-of-work parents while the vast majority of parents are not eligible for budgeting advances. These problems will become more apparent over the next few years as millions of parents migrate over to universal credit. Yet even if the FSF budget is increased and eligibility criteria for budgeting advances relaxed, they remain discretionary ‘quick fixes’ to a fundamentally flawed system of payment in arrears by universal credit. If the government is serious about helping parents to work and stay in work, support with upfront childcare costs should be built into the system and not reliant on ad-hoc wraparounds.