Families will receive up to £1,200 towards cost of childcare under new plan

George Osborne is due to announce a tax relief package to help parents as part of latest Budget

The state will hand 2.5 million families up to £1,200 a year towards the cost of looking after each of their children, under plans to be announced by David Cameron and Nick Clegg today.

The Government’s long-awaited proposals to bring down the cost of some the highest childcare bills in Europe will provide 20 per cent tax relief on the charges up to a maximum of £1,200 for each child annually.

Ministers say it will be more generous than the current voucher scheme operated by less than 5 per cent of employers, which does not provide more tax relief if couples have more than one child. This scheme helps 450,000; five times as many will benefit from the new system, which will be phased in from April 2015. It will help people working for small and medium-sized firms, many of whom now miss out, and the self-employed. It will initially help 1.3 million families with children under five but will be extended, probably over five years, to cover children up to the age of 12.

George Osborne is expected to give more detail of how the £1bn package will be funded in his Budget tomorrow. Campaigners for the low paid may criticise him for helping middle-income earners most to compensate them for the child benefit cuts for families with one earner on £50,000 a year, which took effect in January. People on the 40p tax rate will benefit from the new childcare scheme; the only people exempt will be families with one earner on the 45p top rate, which bites on incomes of more than £150,000 a year from next month.

Critics may argue that the £1,200 per child will cover only a small share of childcare costs in London. But the Government insists the plans will provide help to many families in the capital who currently receive no aid at all.

Ministers hope the shake-up will encourage stay-at-home mums to return to work, boosting the economy by an estimated £4bn a year. Mr Cameron, who will visit a nursery in London with Mr Clegg today, said: “Too many families find paying for childcare tough and are often stopped from working the hours they’d like. This is a boost direct to the pockets of hard-working families in what will be one of the biggest measures ever introduced to help parents with childcare costs.”

Mr Clegg said: “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.” Ministers say an extra £200m will be spent on helping people at the bottom end of income scale with their child care. They could receive 85 per cent of their costs, more generous than the 70 per cent figure under current tax credits.

But some pressure groups believe those on the lowest incomes would have been helped more if Mr Osborne had used the £1bn to extend the “free” 15 hours” of childcare for three and four year olds. There are fears that families with one earner on less than the tax threshold (£9,440 from next month) may miss out.

Gavin Kelly, chief executive of the Resolution Foundation think tank said: “Spending large sums on tax relief that tends to benefit higher-income families does not recognise that low- and modest-income families face the highest barriers to work from childcare costs. It is therefore vital that the Government revises Universal Credit to ensure that low income working families... have an incentive to earn more.”

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