High-quality, affordable child care is essential in improving children’s life chances and supporting parents back into work. The high cost of child care remains a significant disincentive to work for too many parents.
The Government will therefore introduce a new scheme to offer tax-free child care to working families. Support will ultimately be open to 2.5 million working families with children under 12, around five times as many as benefit from the current system. Support will be provided at 20%—equivalent to the basic rate of tax—of yearly child care costs up to £6,000 per child. This will be worth up to £1,200 per child, and so will save a typical working family with two children under 12 up to £2,400 a year.
To be eligible, families will have all parents in work, with each earning less than £150,000 a year, and will not already receive support through tax credits and later, universal credit.
The new scheme will be phased in from autumn 2015, replacing the existing system of employer-supported child care (ESC) and will build up over time to include all children under 12, with all children under five eligible from the first year of operation.
Tax-free child care will extend support compared to the current system of ESC, which provides a tax exemption for child care vouchers and directly contracted child care. ESC will continue for current members if they want to retain it and new claimants will be able to receive support through the new tax-free offer. ESC recipients who are eligible may choose to move into the new tax-free child care scheme if they wish, but will not be able to receive both. ESC will continue to be open to new joiners until tax-free child care is available. The tax exemption available for workplace nurseries will remain.
The Government will also increase child care support in universal credit to improve work incentives and ensure that it is worthwhile to work up to full-time hours for low and middle-income parents. A total of £200 million of support will be provided within universal credit, which is equivalent to covering 85% of child care costs for households qualifying for the universal credit child care element where the lone parent or both earners in a couple pay income tax. The details of how to provide this support will be determined as part of the consultation on the scheme for tax-free child care, to ensure the two schemes operate effectively together.
The new tax-free offer will be phased in from autumn 2015, partly funded by the phasing out of ESC. The £200 million universal credit offer is planned to be phased in from April 2016 as child care support moves from tax credits into universal credit and will be funded from within social security budgets at the time. Details will be set out in future spending reviews.
This announcement builds on support already announced by the Government, including increasing the free entitlement to 15 hours a week of free early education all three and four-year-olds; extending the free entitlement to around 40% of two-year-olds from 2014-15; and extending child care support in universal credit to parents working fewer than 16 hours.
At the same time, the Government are taking action to drive up the quality of child care and give more flexibility to professionals: improving qualifications through introducing early years teachers; increasing Ofsted’s focus on weaker provision, to drive up quality; and reducing bureaucracy for providers. Alongside improving standards in the early years, this will help ensure that parents’ money goes further.
The Government will shortly consult on the detail of the new tax-free child care scheme, including on how employers could continue to play a role in supporting their employees with child care costs within the new scheme.