What childcare really costs on universal credit

Introduction

There are four childcare funding types. These give the context for help with childcare costs provided via the universal credit (UC) childcare element. Briefly, the main types are:

• childcare that is free (‘fully funded’) for every child – ie, so will not need covering by UC. Arrangements vary between England, Scotland and Wales (see Chapter 4 of CPAG’s Financial Help for Families: what you need to know);
• childcare that is free (fully funded) only for some children, based on parents’ benefits, work and immigration status, and occasionally based on children’s needs. As above, arrangements vary between England, Scotland and Wales;
• childcare that is partially funded for working parents who claim UC or working tax credit (WTC) (via a childcare element paid with those benefits), or who are studying. Under childcare element rules, eligible claimants on UC will be paid 85 per cent of the ‘relevant’ childcare costs of this childcare up to a maximum amount – ie, so may have to pay the remaining 15 per cent. WTC claimants will be paid 70 per cent of the same costs, again up to a limit – ie, so may have to pay the remaining 30 per cent. Rules on what is ‘relevant’ childcare vary between England, Scotland and Wales (see the respective childcare element rules in Chapters 5 and 62 of the Welfare Benefits and Tax Credits Handbook);
• childcare that is partially funded for working parents who do not claim UC or tax credits. This is the tax-free childcare scheme, through which the government pays 20p for every 80p certain parents spend on childcare. There is a limit on the value of help available each year. Other tax-related childcare schemes – childcare vouchers and direct employer payments – are now closed to new applicants.

These are not necessarily different kinds of childcare, in different settings or offered by different providers. The difference is just in how they are funded. So one child may have a single 40-hour-a-week nursery place funded by a combination of any of the first three bullet points above and parents’ contributions.

This helps us to answer the following frequently asked questions.

Q Do UC claimants have to pay 15 per cent of all their childcare costs?
A Not necessarily. If a claimant is eligible for chunks of fully-funded care, as described in the first two bullet points above, her/his children might, for example, be looked after for 30 hours a week or more free of charge. The 15 per cent only applies to childcare costs that exceed these entitlements.

That said, if a claimant is not entitled to any fully-funded childcare then, yes, s/he will pay 15 per cent of all childcare costs. The claimant may even pay more if s/he exceeds the monthly UC assistance limit, which is £646.35 for one child and £1,108.04 for two or more children.1

Q Will a claimant ever be better off working after the costs of childcare?
A This will need to be answered on a case-by-case basis, but there are some trends that we can predict. For example, the financial gains are often the smallest in a family where one parent already works and the other is thinking of starting. This potential second earner will not get her/his own UC work allowance, meaning every £1 of her/his earnings will likely reduce the family’s UC award by 63p. The remaining 37p gain is quickly eaten up by childcare costs, the costs of travel and other expenses, making work financially unrewarding.

Meanwhile, other parents might see significant financial gains through starting work, whether because they are eligible for lots of free childcare, have an unused work allowance, or perhaps because working will mean they are no longer affected by the benefit cap.

Q Is it true that UC childcare element will only reimburse childcare costs that have already been paid?
A Yes. The High Court has recently ruled that this approach is irrational and incompatible with human rights law,2 but that judgment is under appeal, which means there will be no immediate change to the rules.

In the meantime, some claimants unable to front a first month’s childcare bill might be able to get around the problem by applying for a budgeting advance. They will need to satisfy eligibility criteria and will also have to factor in future deductions from their UC award to repay the advance.

The Flexible Support Fund, sometimes cited as a solution to the problem of up-front costs, is unfortunately not a complete solution. The DWP will not make any UC payment in respect of childcare already funded by the Flexible Support Fund.3

Q My client gets fully-funded childcare, described as being for 15 or 30 hours a week, but this only applies during term time. What is she supposed to do during the holidays?
A S/he should check (or get advice) about the relevant rules for fully-funded childcare, which vary across the home nations. In England, for example, ‘15 hours of free childcare a week’ actually means 15 hours a week for 38 weeks of the year, or 570 hours a year in total. ‘Thirty hours of free childcare’ means 1,140 hours a year.

Claimants can spread their entitlement over 52 weeks instead of 38;4this leaves them with slightly less than 11 or 22 hours a week of care, not 15 or 30. Advisers should keep these figures in mind as the ‘real’ amounts of fully-funded childcare.

Spreading the entitlement out like this will usually make financial sense (unless the claimant only works in term time), avoiding inflated holiday childcare bills which risk exceeding the UC assistance maximum.

Q I’ve heard about tax-free childcare – can my client use it in combination with the UC childcare costs element?
A No. UC claimants (and people claiming tax credits) are not eligible for tax-free childcare.5Advisers should not forget about tax-free childcare, though, since it will factor in ‘better off’ calculations about how a client’s finances might look in different employment scenarios.