The government's tax-free childcare programme has been delayed until 2017. Professor Chris Rowley examines the regimes being introduced and still available.
At a glance
- A doubling of free early-years childcare and replacement of vouchers with tax-free childcare will overhaul the system
- Funding the free childcare scheme is an issue and affordable childcare supply low
- There will be winners and losers in the new arrangements so employers need to be aware of the potential pitfalls
The Queen's Speech included the headline grabbing announcement of a doubling from 15 to 30 hours of free childcare a week for three and four year olds, equivalent to £5,000 per year, per child. This will cost approximately £350m per year and be funded by curbing pension relief on the highest earners.
But what affect will this have on women in the workplace?
Parents with affordable childcare arrangements are less likely to take time off work or worry while they are there and are more likely to come back after maternity leave. So, in theory this new proposal should beneficially increase female participation in the labour force and their careers as employment breaks impede prospects.
According to the Organisation for Economic Cooperation and Development (OECD) in 2012 the UK ranked 16 out of 34 nations in the OECD in terms of mothers going to work (67.1%). This compared to 84% in Denmark, 78.5% in the Netherlands and 73.6% in France. So it seems the UK has a way to go to catch up.
However questions have already been raised, such as by the chief executives of the Pre-School Learning Alliance and Family and Childcare Trust. They queried the new scheme's complexity, feasibility (the existing offer is under-funded) and coverage (it is also more narrowly defined for working families and so misses deprived children who might need it the most).
Focus on quality
The focus should not be on ‘Never mind the quality, feel the width' but on the quality of early education and care. Current government funding does not cover the cost of delivering 15 hours and so it has been left to providers and parents to make up the shortfall. Why would the new system be any different?
As the Childhood Wellbeing Research Centre discovered in 2013, the use of supply-led systems and fee capping regulation in countries depressed the growth of the private childcare market and there was more reliance on voluntary, co-operative and state provision.
By contrast in the UK where parents are reimbursed through the tax and benefit system for the childcare they choose to purchase in an open childcare market, fees are set by providers in order to maximise profitability. Furthermore, there is the complexity and bureaucracy of subsidies, employer tax-free vouchers and such. A better system (albeit with time considerations) of nursery schools and crèche facilities, both state and company provided, could be considered as far more efficient and transparent in costs.
Following the Conservatives' surprise general election campaign of doubling the current provision, reinforced with the subsequent Queen's Speech, the area of childcare has suddenly come into the spotlight and raised its profile for businesses and practitioners.
Rush to vouchers?
Given this, a common question will be: might we see a rush of people trying to get onto the voucher scheme before it closes?
I would think not as the current system is employer-focused. While employees can ask, would firms not have done so already? Furthermore, at this late stage of a system that is being replaced, will employers be likely to do anything or move quickly enough? While in theory the current system saves them the national insurance (NI) contributions, it still has set-up and administration costs. The new system will carry no such burden on employers.
The big losers will actually be those childcare voucher (CV) provider organisations and staff. They did not exist before the current scheme and may dwindle after its demise as their raison d'etre will erode over time with the shifts from indirect (employer provided vouchers) to direct (using the tax system). This has not been mentioned by politicians or practitioners.
The CV scheme will continue for those already using it, but will be closed to new entrants in 2017. Parents who use CVs can switch to the new tax-free childcare (TFC) scheme, but they will not be able to have both or be in the CV scheme for one child and the TFC scheme for another.
TFC will be open to families where both parents work + earn up to £300,000 between them, or single parents earning less than £150,000. It enables parents to get a 20% rebate per child on the annual cost of childcare of up to £10,000. Parents will see the cash paid into an account that they must set up with HM Revenue and Customs rather than a rebate through the tax system. To be part of the scheme parents will need to apply when it starts in 2017.
The government says around 1.9 million families could benefit, twice as many as under the CV scheme. TFC is expected to help many more working families as it covers the self-employed, as well as part-timers earning £50 per week and above, those on maternity, paternity or adoption leave and those starting their own business who may not meet minimum earning requirement, giving them government help with childcare costs for the first time.
Given this and shifts from an employer-based to consumer-led process there will be winners and losers, dependent on personal circumstances, employment and tax situations.
Which scheme your employees will be better off using depends on a few factors, including:
- If they are self-employed or in firms without the CV scheme, then they gain. The majority of parents will benefit. However, those likely to be better off sticking with CV are couples where one parent does not work as they will not be eligible for TFC.
- Whether one or both parents are in a CV scheme
- The rate of tax paid
- And the number of children
For example, a lone parent with 1 child and receiving the maximum support through a CV scheme for a basic rate tax payer would save a maximum of £933 per year (£1,866 per family). This would be less for higher tax rate payers.
If they joined the TFC scheme they would be saving a maximum of £2,000 per year, but TFC is per child whereas the CV is per parent per year.
High childcare costs
According to the Centre for Policy Studies (CPS) the UK suffers from both high private and public childcare costs. While there is a role for targeted state expenditure, especially on those from the poorest backgrounds, the government should look at broader reform of sector if it is really going to tackle triple challenge of affordability, access and quality.
The CPS adds that the childcare sector suffers from a high cost base but has poorly paid staff and so does not attract many higher qualified staff. At the same time, barely 30% of providers make a profit or are in surplus - partly because of the burdensome regulatory framework in areas such as staff-to-child ratios.
So it argues that regulatory reform is required making it easier to deliver childcare in schools and simplifying existing funding streams therefore necessary to raise performance and cut costs.
In addition, the Institute of Fiscal Studies questions the efficiency of the new policy. The current 15 hours policy costs government £700m but saves only £70m in the form of higher tax revenues and lower benefit spending and when those who would have paid for it anyway are taken into account.
Chris Rowley is professor of human resource management at Cass Business School, UK and adjunct professor at Griffith Business School, Australia.
The options explained
Parents pay in to the scheme from pre-tax and NI salary for registered childcare mostly by salary sacrifice. It is only available through employers who gain by saving NI, so it is not accessible for the self-employed or carers as earnings need to go through PAYE.
No new entrants will be allowed after tax-free childcare has launched but it will continue as long as the employer maintains the scheme and the employee stays with the employer.
Free early years childcare
The Conservative government is doubling the current allowance to 30 hours per week (1,140 hours per year over 38 weeks) for 3-4 year olds.
They expect to help 600,000 children by 2017 costing £5,000 per child at an overall additional cost of £350m per year.
More hours but funding issues ie 20% short with current system ie providers awarded £3.88/hour while actual was £4.53/hour (Pre-School Learning Alliance). There are also shortages of qualified providers - these require long term staff resourcing, but poorly paid and qualified.
Parents must set up their own account with HMRC who will be running the scheme. Its introduction has been delayed until 2017.
They will receive 20% of annual costs per child as a top-up by government up to a limit of £10,000.
This is open to a wider range of qualifying parents. Couples where only one parent works are not eligible for TFC, but the employed parent would be eligible for CVs if offered by their employer.
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