Families' incomes being wiped out by childcare costs and withdrawn tax credits

The Resolution Foundation study, Counting the costs of Childcare, reveals that the effects of childcare costs can be dramatic on middle-income households.

It claims that in the most extreme case a woman working full-time could earn as little as £4 a week in extra pay, £211 a year from a salary of £11,900, if her partner is also working full-time for the same pay, after the cost of childcare for two children and the loss of tax credits, which would be gradually withdrawn as the family's income rises, are taken into account.

Full-time working parents are assumed to work 37.5 hours per week. Part-time working parents are assumed to work 18 hours a week. For couples, the main earner’s wage rate is taken to be 50 per cent higher than that of the second earner, with the exception of the low earner couple where both parents are on minimum wage.

According to the report, middle-income families fair no better. A couple with two children earning £44,440 before tax and nominally £20,000 a year better off than a low-income family of the same size, see this financial advantage almost wiped out by childcare and lost tax credits.

While both families pay £13,529 per year for full-time care for two children, the lower-income family receives more than £11,000 in benefits towards the cost. This means that despite the middle-earning couple’s income being 87 per cent higher, after taxes, benefits and childcare costs, they are only 17 per cent better off, with a disposable income of £27,000 compared to £23,000 for the lower-income family.

The Resolution Foundation says that the more hours parents take on the more their incomes can fall. A second earner from a middle-income household paid £12 an hour adds £4,500 to the family income if working 13 hours a week. But if the second earner increases their hours, that amount starts to fall because of the cost of childcare and withdrawn support.

The report warns that with the incentives to work so finely balanced for second earners, there is a real risk that many mothers will drop out of employment altogether. With fewer women in work living standards will be affected, putting more children at risk of growing up in poverty and putting the economic recovery under threat.

It concludes that it makes little sense to invest more in the current-means tested tax and benefit system on childcare because of the strong incentives against work that are built into it. Instead, the report recommends that extra resources be spent on a simpler system of highly-affordable non-means tested support.