Osborne takes cheap option on child care

'Independent' survey reveals concerns that central plank of mid-term review suits high earners

George Osborne will announce tax breaks for child care next month in a move that will benefit better off families significantly more than it helps those on low incomes, according to a study for The Independent.

The Chancellor is expected to overrule Nick Clegg by announcing that parents will be able to write off up to a third of their child care costs against tax. The Liberal Democrats are arguing for an alternative plan which would see the state provide more free care.

Currently, parents of three- and four- year-olds are entitled to 15 hours a week of free care during school terms. The Resolution Foundation, a think tank specialising in low and middle income groups, has warned the Tory plan will help the better off most.

It also warned that the burden of child care is even bleaker for families than previously thought when housing costs are taken into account.

There are fears the announcement, a major plank of its mid-term review, will be dubbed "tax relief for nannies". Critics say it could give the impression the Government is helping better off mothers return to work rather than those on low incomes.

The Lib Dem plan to extend universal help through more free hours won some support from Elizabeth Truss, the Conservative education minister responsible for child care, but has been blocked by the Treasury.

The Resolution Foundation said: "Additional investment in the universal offer is preferable to greater investment in means-tested support through the tax credit or forthcoming Universal Credit system, given that investment in means-tested support reduces incentives to progress in work." Yesterday government sources said no final decision had been taken, and insisted the policy would be fair: "There is no great row. The two Coalition parties want to achieve the same thing. We are working out how to get there." The study found that a family on £39,693 (50 per cent more than the average wage) with two children under five in full-time child care spends 22 per cent of its disposable income on the care, rising to 28 per cent when rent or mortgage costs are included. For a household on £53,924 (twice the average wage), child care soaks up 30 per cent of their disposable income, increasing to 40 per cent when housing costs are included.

It said: "Although the middle income family starts off 79 per cent better off than the low income family, after housing and childcare costs it is almost no better off – only eight per cent ..." The report added: "A second earner on the minimum wage is only £4-a-week better off if she works full-time than if she did not work at all."

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