Poorest families to miss out on £1,000 a year for help with childcare under voucher system

Government’s flagship proposal risks short-changing the very people it is intended to support

Political Editor

Nearly one million of Britain’s poorest families are to miss out on £1,000 a year for help with childcare, new analysis reveals today.

The Government’s flagship proposal to give struggling families childcare subsidies – to be given the green light by George Osborne in this month’s Budget – risks short-changing the very people it is intended to support.

Analysis by the Resolution Foundation think tank reveals the extent of a loophole in the scheme which is likely to affect 900,000 households on the lowest wages. Under the Chancellor’s £2bn childcare plan, families who qualify for universal credit will have 85 per cent of their childcare costs subsidised, but only if there are two earners paying income tax. In households with two earners who are eligible for universal credit but one or both parents do not pay income tax, 70 per cent of childcare costs are met by the government.

The difference amounts to £20 a week, or around £1,000 a year, in childcare payments. Those families affected will be forced to pay more in childcare costs than those on higher earnings. The Resolution Foundation, which calculated the figures, said it supported the Government’s childcare policies but called on the Chancellor to close the loophole. The scale of the poor families missing out is likely to cause anger, particularly because Mr Osborne is also expected to confirm £1,200 in the form of tax-free childcare vouchers for people not eligible for universal credit who have a combined income of up to £300,000. Analysts suggest that reducing the upper threshold to £200,000, for example, could allow some of the £2bn expenditure on the childcare plan to close the loophole and help the poorest families.

The new voucher plan will be introduced in 2015, while the universal credit payment for childcare will be brought in from 2016. Childcare costs in Britain are among the highest in Europe, and it is often the deciding factor on whether parents – mainly mothers – go back to work.

Many of the households affected will have one parent in low-paid, part-time work. The analysis by the Resolution Foundation shows that a family with a gross income of £21,000 – a main earner on £7.50 an hour and a partner who is paid the minimum wage of £6.31 – with annual childcare costs of £6,800 (the average for England) would receive a 70 per cent subsidy. They would pay £2,040 of their own money towards childcare – or 7 per cent of their net income.

A second family with a gross income of £33,000, where both parents  pay income tax and qualify for universal credit, would see 85 per cent of their annual childcare costs of £6,800 met, leaving them with £1,020 to pay – 6 per cent of their net income.

A third family, with a gross income of £87,000 where both pay income tax but do not qualify for universal credit would be able to claim up to 20 per cent of their childcare costs of £6,800. This would leave them with £5,440 to pay – 9 per cent of their net income.

Vidhya Alakeson, deputy chief executive of the Resolution Foundation, said: “With some relatively simple changes ... such as reducing the level of income eligibility, it would be possible to extend the more generous level of childcare support to all working families who qualify for universal credit. It’s the poorest working families who find the cost of childcare the biggest barrier to taking on more work.”

Shadow childcare minister Lucy Powell said: “This is affecting many more families that previously thought. The Government must come up with a solution quickly.”

Figures obtained by Labour show that the number of children in families where parents want to work full- time but are forced into part-time jobs has increased by 46 per cent since David Cameron came to office.

Catherine McKinnell, shadow Treasury minister, said: “Getting parents into work should be the key step towards ... reducing the number of children living in poverty. But for far too many families at the moment being in work just isn’t enough.”

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