Childcare is broken: even a three-year-old could tell you

I love receiving emails from FT readers, but I was not prepared for the inbox tsunami following this week’s Money Clinic podcast episode about rising childcare costs.

Professional parents are being financially crippled. Paul Bridges, a 35-year-old dad and FT reader from south-west London pays £2,200 a month for full-time childcare for his two-year-old daughter — the same amount as his mortgage.

He and his wife work full time in well-paid jobs. They have £1,500 left to cover their other monthly costs including bills, groceries and driving their daughter to the nearest full-time nursery place they could find.

“At the risk of sounding whiny, we are running at a net loss, and burning through the savings we had luckily cobbled together before our daughter was born,” he says.

Another FT reader from Clapham emailed me in dismay as her child’s nursery has just increased full-time fees for under-threes to £30,000 a year: “They are children under three years old, not doing an MBA!”

Research by the Early Years Alliance, a nursery industry group, has shown how shortfalls in government funding for so-called “free” hours has created a funding gap that leaves nurseries with no option but to charge parents more — or close their doors.

About 400 nurseries in England have folded since August 2020, reducing choice and increasing prices in what is already the second-most costly childcare system in the world, according to the OECD.

There’s more bad news. Costs for childcare providers in England are likely to rise by 9 per cent over the next tax year, according to the Institute for Fiscal Studies think-tank, putting the funding model under yet more strain.

Ahead of the Autumn Statement, there are growing calls to address the cost and complexity of childcare — especially as tax freezes will affect working parents more than they might realise.

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“For two-thirds of families, we know that their childcare costs are the same or more as their rent or their mortgage,” says Joeli Brearley, founder of campaign group Pregnant then Screwed, which has been leading calls for reform.

The group says one in 10 parents have left their jobs due to childcare issues and 57 per cent have cut their working hours due to childcare costs or availability.

“It means they end up on what we affectionately call ‘the mummy track’ where you’re working part-time, have very little chance of career progression and, of course, you’re being paid less,” she says.

Our podcast guests debated the complexity of accessing the 30 “free” hours per week of nursery care for three to four-year-olds and the tax-free childcare system. The latter is worth up to £2,000 a year, per child — yet many working parents have never heard of it.

For every £8 you pay in to your tax-free childcare account, you receive a £2 top-up. The good news is parents can use this with any Ofsted-registered service, including nurseries, nannies and childminders, plus after-school and summer holiday clubs.

However, there’s a high danger the clunky admin could lead to tantrums. “It makes me want to throw the laptop out of the window at the end of each month,” said one parent battling to reconcile the quarterly calculations.

Others complain the limited value of the benefit has been wiped out by cost increases passed on by childcare providers. Maybe the chancellor will surprise us by increasing it at the Autumn Statement, but I won’t be holding my breath.

However, the combination of rising inflation and frozen tax thresholds is chilling news for parents — especially if one of you gets a pay rise or a bonus which pushes your pay into six-figure territory.

Tax-free childcare can be used in conjunction with the 30-hours scheme, but to qualify for either, each parent has to be working with an annual income below £100,000.

Introduced in 2017, if this threshold had increased in line with inflation, it would be nearly £120,000 today.

Of course, £100,000 is also the threshold at which the £12,570 personal allowance starts to be tapered away at a rate of £1 for every £2 you earn, equivalent to a 60 per cent marginal tax rate.

Brought in by then chancellor Alistair Darling in 2010, had this threshold increased in line with inflation, it would now be just shy of £140,000.

So parents have a lot to lose if one of them busts the £100,000 threshold.

A parent with income of £99,999 could potentially be better off than one with income of £125,140, says Alistair Cunningham, a chartered financial planner at Wingate Financial Planning.

Why? Paying full whack for your 30 free hours while losing up to £2,000 in tax-free childcare and your £12,570 personal allowance could wipe out your increased income — especially if you have more than one child, or live in an expensive area like Clapham.

“This is definitely an incentive to earn less than £100,000 or completely smash it,” Cunningham says.

Another pinch point in the tax system is the £50,000 threshold at which child benefit starts to be removed (parents lose 1 per cent of benefit for every £100 of income above this).

Introduced by George Osborne in 2013, this threshold would start at nearly £63,000 had it risen in line with inflation.

Parents are being doubly squeezed by the effects of all this “fiscal drag” and above-inflation increases in the cost of childcare. Frankly, it’s no wonder the UK birth rate is plummeting!

Those who are still able to use the legacy system of childcare vouchers have a tax advantage, as these are purchased via salary sacrifice arrangements which can reduce taxable pay below these thresholds.

If parents don’t qualify for these, they could reduce their income by increasing their gross pension contributions by enough to keep their childcare subsidy — but the numbers aren’t going to stack up for everyone.

Many couples have begrudgingly accepted that part-time work and reduced career progression for the lower-earning parent is the only feasible option.

“What is the point of subsidising university education if we then cripple the career prospects of graduates who pause or quit their jobs to look after their children?” asks Bridges.

He and many other readers feel an instant boost to economic growth could be generated by enabling families to care for children more affordably, keeping parents in the workforce without fear of being financially ruined.

But if there’s no hint of reforming our broken childcare system at the Autumn Statement next week, I think a lot of adults will be bawling — never mind the kids.

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Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com; Twitter and Instagram: @Claerb