Welfare Reform Bill

Memorandum submitted by Daycare Trust (WR 35)

Daycare Trust briefing – Welfare Reform Bill

Committee Stage, House of Commons

March 2011

This briefing offers Daycare Trust’s support for amendments 27 and 28 which seek to insert a specific mention of support for childcare costs on to the face of the Bill.

About Daycare Trust

Daycare Trust is the national childcare charity. Established in 1986, we lead the national childcare campaign by producing high quality research and information, developing credible policy recommendations. We campaign for quality, accessible, affordable childcare for all and rais e the voices of children, parents and carers. Our advice and information on childcare issues assists parents and carers, providers, employers, trade unions and policymakers.

Overall view of the Bill

· Daycare Trust welcomes the Bill’s aim of simplifying the benefit and Tax Credit system and improving work incentives through ending very high marginal tax rates. The complexity of the current system prevents many people from claiming the support to which they are entitled, and leads to errors and incorrect payments.

· The White Paper 21st Century Welfare suggested that more than 600,000 people could face a participation rate of more than 90 per cent. It noted that this did not include in-work costs such as travel, which can easily wipe out a meagre financial gain. Childcare is another in-work cost, and the level of expense is likely to be significantly more than that for travel. The challenge of reducing marginal tax rates is therefore even more challenging for parents of young children.

· We therefore believe that the success of the Government’s objectives of simplifying the welfare system, encouraging work, removing cliff edges and ending child poverty depend critically on the support available for childcare costs.

· We welcome the Government’s intention to extend support to those working fewer than 16 hours per week. This group has previously missed out on support, which has reduced incentives to move in to work. However we do not believe this should come at the expense of those working more than 16 hours by reducing the percentage of costs covered or the maximum limits.

· We believe that expanding the total budget available to childcare support would be cost-effective for the Government. Rather than a cost to the benefit system, childcare support should be seen as an essential investment in supporting parents to work. In the long run it will lead to a reduction in spending on out-of-work benefits and higher levels of employment among parents. Investing in the early years also has the benefit of supporting child development (as acknowledged in the recent reports by Frank Field MP and Graham Allen MP) and reducing the inequalities which are already present when children start school.

Why is support for childcare costs so important?

From our research and our work supporting and advising parents, Daycare Trust knows that for many parents, it would be impossible for them to work without support for childcare costs.

· Childcare costs are high and rising – our Childcare Costs Survey 2011 found that a part-time (25 hours) nursery place for a child aged two and over is £94 per week in England. This has risen 4.8 per cent since 2010. In London the cost is £113 per week.

· There has been significant investment in childcare over the last decade and the number of full daycare places has doubled. Other than the childcare element of Working Tax Credit, the main childcare support available to parents is 15 hours of free early years education for all three and four year olds (soon to be extended to the 20 per cent most disadvantaged two year olds) and tax-deductible childcare vouchers. In practice, this means that most working families receive no help with their childcare costs until their child is three years old, despite the fact that childcare is most expensive for children aged two and under because of the need for higher staff-to-child ratios.

· For parents with school-age children, there is often no other sources of childcare support as childcare vouchers are often not accepted by after-school providers. Yet the average out-of-school club in England costs £45 per week for 15 hours. With budget cuts to local authorities, there is some anecdotal evidence of councils increasing charges for breakfast and after-school clubs or reducing levels of provision. It is therefore essential that this group have access to financial support for childcare.

· Research from the Department for Education found that a quarter (24 per cent) of parents report that they find paying for childcare difficult or very difficult, and lone parents are even more likely to report this (34 per cent compared with 18 per cent of couples).

· Currently 485,000 families are benefiting from the childcare element of Working Tax Credit, receiving an average of £70 per week. The majority (61 per cent) of these are single-parent families and they typically receive a higher amount of support than couple families (£72 per week compared to £65 per week for couples). Any reduction in the level of support would therefore have a disproportionate impact on single-parent families.

The level of support for childcare costs

· The amendment tabled specifies that support should be set at 80 per cent of a prescribed allowable amount. We believe that 80 per cent of costs covered is the minimum amount to ensure positive work incentives for parents. This is based on calculations by Family Action which show that the effective marginal deduction rate for a working family paying income tax and national insurance, with childcare costs of 80p for each additional pound earned [1] would be 100 per cent if only 70 per cent of childcare costs were covered. If 80 per cent of childcare were covered then the marginal deduction rate falls to 92 per cent.

· In high cost areas even finding 20 per cent of the cost of childcare can be difficult for parents on a very low income. We therefore believe that ideally parents should receive 100 per cent of costs. Currently, up to 97 per cent of costs can be claimed through Housing Benefit and Council Tax Benefit. Support for 80 per cent of costs would therefore be a reduction in support for these families. If the level of support was set at 70 per cent, many families could end up paying ten times more towards childcare costs from their own pockets.

· We believe that there is a strong argument for providing a higher proportion of costs for childcare for disabled children. This is because childcare for disabled children is more expensive and there is a lack of suitable provision. This reduced capacity to work leads to families with disabled children being more likely to live in poverty.

· We believe that the maximum level of childcare costs that can be claimed for should be increased for larger families. Currently the maximum levels are £175 for the first child and £300 for two or more children. Given that there is not usually a cost saving for a second child attending a childcare provider, this can cause problems for families with two children. However it is particularly problematic for families with three or more children who cannot claim any additional costs. We therefore believe that there should be an additional higher limit set for these families.

The design of childcare support under Universal Credit

· Daycare Trust has been involved in several meetings with officials from the Department for Work and Pensions about the design of the new system for childcare support. We welcome this willingness to consult and to work with stakeholders to explore the options.

· We welcome the Secretary of State’s statement at Second Reading that the support would be an additional amount rather than a disregard, as we believe this is easier for parents to understand and will lead to better targeting of support.

· We believe that childcare costs should be paid to the main carer, in the form of a direct payment, rather than a voucher. This is because we believe that families should have the opportunity to manage their family budgets in the way that best meets their needs and supports financial inclusion. Paying to the main carer would mean that the person who in most cases had signed a contract with a childcare provider would have the means to meet the requirements of that contract. A voucher system would have costs associated with its creation and maintenance which we believe would be better used by supporting families directly. We also believe it could be inflexible (for example allowing parents to split their payments between providers and change the levels of payment regularly if their patterns of use change) and it could be burdensome for some providers (for example childminders, some of whom rely on paper records and cash payments). We believe there is also a confidentiality issue as parents may not wish their childcare provider to know that they are receiving help with their costs through Universal Credit, as this may allow the provider to make assumptions about the parent’s circumstances.

· One of the major problems with the current system is the requirement for parents to report any changes in their circumstances. We believe that parents would value greater certainty and stability with their payments. We therefore believe there are merits to exploring fixed payments (for example for six months, as previously suggested by the Liberal Democrats) or income bands. However we believe that even with fixed awards parents should have the option of reporting any changes so that they do not lose out if their income falls suddenly, for example. We welcome the suggestion of light-touch reminders to parents to check whether their costs have changed, for example by text message or email, and at key times, for example the start of the school year.

· We believe that once the structure for childcare support within Universal Credit has been designed, the Government should hold a formal consultation before deciding on the detail of how the system will work.


Daycare Trust’s welcomes the changes to the Bill suggested by amendments 27 and 28 as they make clear that childcare support will be provided through the Universal Credit and specify that this should be at a minimum level of 80 per cent of allowable costs. We believe that this is the minimum level of support required to ensure marginal deduction rates of less than 100 per cent. We look forward to continuing to work with the Department for Work and Pensions to offer our views as the new system is developed.

March 2011

[1] Parents may not require an extra hour of childcare for each extra hour of work if, for example, they also use informal childcare provided by a family member.