39.The Government sets both a maximum rate of reimbursement, and a maximum cap on allowable childcare fees under both UC and WTC. These determine the value of childcare support that households can receive:
This means that the maximum caps for childcare costs under UC and under WTC are essentially the same. UC has a more generous maximum reimbursement, however, permitting claimants to receive more of their costs back, subject to earnings and not exceeding the maximum caps.
40.The maximum reimbursement rate under UC was initially set at 70%. Following a consultation, the Department announced in August 2013 that it would increase the maximum reimbursement from 70% to 85%. We heard substantial support for this decision. Witnesses drew our attention, however, to the fact that maximum caps for childcare were not increased between WTC and UC—and indeed have not been uprated since 2005. Since then, the costs of all types of formal childcare across the UK have risen well above the rate of inflation, and have outstripped earnings (see Figure 2). We heard that this “makes it extremely difficult for families with low earnings to afford full time child care”, because costs frequently exceed the maximum cap. We also heard that a failure of Government funding to keep pace with the costs of childcare can mean that providers are unable to remain in business. In turn, this makes it more difficult for parents and carers to find affordable childcare that meets their needs.
Figure 2: Weekly childcare costs for under two-year olds in England, Scotland Wales
41.We asked the Department whether it could tell us what proportion of UC childcare recipients were claiming the maximum amounts for childcare. It told us that it does not currently have this information available, and that it would provide an update “in 2019”. The Joseph Rowntree Foundation told us that a lack of data makes it “difficult to know” the precise number of families affected by the UC childcare maximum cap. They cautioned, however, that even knowing the number of families claiming the maximum allowance would likely understate the numbers affected. This is because if the existence of the cap makes working and claiming childcare economically unviable for some households, then those households would not show up in the claimant statistics. We heard that families in parts of the UK with higher costs are particularly likely to experience disincentives to work as a result of the cap. The Family and Childcare Trust, for example, found that the cost of childcare in London has risen 7.4 times more quickly than average earnings over the last decade. They reported that in 2018, the costs of part-time nursery childcare for a child under the age of three were 70% higher in inner London (the most expensive region) than in Yorkshire and the Humber (the cheapest).
42.The maximum reimbursement that WTC claimants could receive for childcare under that system was 70%. The Resolution Foundation found, however, that when combined with support via the council tax and housing benefit systems, approximately 100,000 households were receiving support for up to 96% of their childcare costs under the legacy system. This additional support will not be available under UC. The Child Poverty Action Group told us that people who will be affected by this change are likely to include some of the lowest-income UC claimants. The Women’s Budget Group explained that, given the high costs of childcare overall, families receiving the maximum 85% support and using full time childcare could still face considerable shortfalls. These are likely to be particularly difficult for low-income families to absorb.
43.Save the Children explained that since UC awards decrease as household earnings rise, many claimants will receive less than 85% of their costs if they increase their earnings. They explained that this reduces incentives for parents and carers to enter work or increase their earnings, since they will be faced with higher childcare costs that are not covered by UC. We heard that these disincentives are particularly high for “second earners” in a household. UC claimants who have responsibility for a child are eligible to receive a “work allowance”. Their UC awards do not start to reduce until the household has earned over this specified amount. But for second earners the work allowance is likely to be exceeded by their partner’s income. This means they face disincentives due to their award tapering away as earnings increase, but that they do not correspondingly benefit from the work allowance. The Resolution Foundation told us that plans announced in the 2018 Budget to increase households’ work allowances are “very welcome”. They noted, however, that there is still “some way to go before [UC’s design] sufficiently incentivises work for single parents and dual-earning families, and supports pay progression”.
44.Save the Children, the Centre for Social Justice and the Women’s Budget Group told us that there is a strong case for increasing the maximum reimbursement for childcare to 100% of allowable costs. Save the Children told us that this would reduce barriers to work resulting from not being able to afford childcare and improve work incentives. Their recent report with the Centre for Social modelled the impact of moving from 85% to 100% of allowable costs on work incentives for second earners (Figures 3 and 4).
Figure 3: Impact of moving from 85% to 100% reimbursement for second earners
Figure 4: Impact of moving from 85% to 100% reimbursement for lone parents
The Centre for Social Justice further described offering up to 100% reimbursement as “an accessible message that can be easily communicated and digested, which is likely to improve uptake” of support. Their joint report with Save the Children identified the complexity of childcare support as a key factor preventing parents from taking it up. Save the Children and the Centre for Social Justice estimated that moving from 85% to 100% would cost in the region of £300 million per year once UC is fully rolled out.
45.We heard that improvements to the financial support available to UC claimants could be cost neutral overall. Save the Children and the Centre for Social Justice highlighted potential for increased tax receipts from UC claimants, although acknowledged that these are “hard to predict”. They also suggested costs could be offset by redirecting childcare support for wealthier families to UC claimants. Households with incomes of up to £200,000 can currently claim Tax Free Childcare and the 30 free hours. The Centre for Social Justice and Save the Children said:
We have constructed generous subsidies for better-off families while thousands of low-income families are not able to progress in life, in part because they cannot meet the childcare needs that accompany returning to work [ … ] It is time to redress this imbalance and place funds where they are most effective and most likely to deliver social justice. The transformative potential of subsidised childcare is greatest at the lower end of the income scale where it can increase take-home pay more substantially in relative terms, help reduce household worklessness and support parents who want to work, and give children with less support in life a better chance to thrive.
Table 1 shows Save the Children and the Centre for Social Justice’s calculations of savings from reducing the upper earnings thresholds for claimants of Tax Free Childcare and 30 hours free children:
Table 1: Estimated savings from lowering the upper earnings threshold for TFC and 30 hours free childcare
46.Most Universal Credit claimants will be able to claim back a greater proportion of their childcare costs under Universal Credit: up to 85%, rather than 70% under Working Tax Credit. This is very welcome. But as things stand some 100,000 households will receive less under Universal Credit than they would have under the legacy system. This includes households who are among the poorest Universal Credit claimants. And for many claimants, the costs they are able to claim back will fall short: the maximum amounts that the Department will reimburse for childcare have not increased since 2005. To ensure work always pays for Universal Credit claimants, the Department has a choice: it can increase the maximum reimbursements, or it can increase the maximum caps. We recommend the Department:
i)Review the maximum caps on childcare costs that can be reimbursed under Universal Credit. This should include modelling the effect of higher caps on work participation amongst claimants with children, and introducing a “London weighting” to account for the very high costs of childcare in the capital. The Department should use this work to inform its thinking on whether further regional variations would be appropriate; and
47.It is unacceptable that households claiming Universal Credit—amongst them the poorest in society—are struggling with childcare costs while the Government is funding support for households earning up to £200,000 per year. We recommend the Government divert funding from the schemes aimed at wealthier parents (Tax Free Childcare and the 30 hours free childcare) towards Universal Credit childcare.
84 Gov.uk, , and Gov.uk, , December 2018
85 DWP, , December 2014
86 Joseph Rowntree Foundation (), Citizens Advice (), Women’s Budget Group ()
87 Joseph Rowntree Foundation (), CPAG ()
88 Joseph Rowntree Foundation ()
89 Qx (Jonathan Broadbery)
90 , 15 Nov 2018
91 Joseph Rowntree Foundation ()
92 Joseph Rowntree Foundation ()
93 Harding and Cottell, , p.6
94 Alakeson, V. & Hurrell, A. (2012), . London: Resolution Foundation
95 CPAG (). See also: Joseph Rowntree Foundation (), Save the Children (), Centre for Social Justice (), Women’s Budget Group ()
96 Women’s Budget Group ()
97 Save the Children ()
98 Gov.uk, , December 2018
99 Resolution Foundation ()
100 Resolution Foundation (). See also: LITRG (), Policy in Practice (), Save the Children (), CSJ and StC,
101 Women’s Budget Group (), Save the Children (), Centre for Social Justice ()
102 Centre for Social Justice ()
103 See Chapter 4. CSJ and StC,
104 CSJ and StC, , p.41
105 CSJ and StC, , p.41
106 CSJ and StC, , p.43
Published: 23 December 2018