The Spring Budget 2023 contained a very important announcement for new parents. Those with children aged between nine months and four years old may soon be able to claim free childcare. This could make a big difference to the livelihoods and finances of households across England. For many years now, the UK has been the most expensive country in the developed world to raise a young family. Indeed, many British parents effectively “pay to work” due to the cost of childcare exceeding their wage. In this article, our Carlisle financial planners at Vesta Wealth explore why UK parents face such high childcare costs and how the 2023 Spring Budget could change the situation. We also offer ideas to help parents avoid paying to work for childcare.
Why is childcare so expensive in the UK?
In short, childcare is very labour-intensive and this makes it expensive. Currently, the UK has an adult-to-child ratio of 1:4 for 2-year-olds (although there is a consultation to change this to 1:5). If you assume that you pay someone the National Living Wage of £9.90 (assuming they are 23 years old and live outside of London) to look after a full group of 4, then each child is north of £2.47 per hour. However, the childcare provider then also needs to account for rent, energy and other business costs. When everything is added up, some significant costs need to be passed to parents!
How does the UK compare to other countries for childcare costs?
According to the OECD (the Organisation for Economic Co-operation and Development), the UK is the third-most expensive country in the world for childcare. Switzerland and New Zealand take the top spots. Childcare costs in the UK have been rising for years and British parents now face childcare costs which are over double the OECD national average. A 2-earner family in the UK is currently paying over 30% of their post-tax income on securing childcare. Some parents are paying 80% or more of their earnings.
By contrast, Sweden is renowned for holding the crown as the cheapest country in the world to raise a young family. Fees for preschool childcare are income-based and are capped at €145 (£127) per child per month. Childcare is widely regarded as part of the state’s infrastructure, so the Swedish government provides a heavy subsidy to providers.
Will the 2023 Spring Budget transform UK childcare costs?
Chancellor Hunt is facing a budget deficit and a challenging economic landscape. Higher living costs (inflation), in particular, are putting more pressure on household finances. Getting more people back into work will be important to help raise productivity. Righty, the Chancellor has identified that many people – particularly women – delay going back to work because it is cheaper to stay at home with young children than return to work and pay for childcare. By offering more free childcare support (and expansion costed at £6.5bn), the government hopes that more parents will choose employment. In turn, this could mean more jobs where earnings can be taxed.
So what exactly do we know from the Spring Budget? Currently, some eligible working parents can claim up to 30 hours of free childcare per week for children aged between three and four. These can be claimed during 38 weeks in a given year during the school terms. All parents with three or four-year-olds can claim 15 hours per week. The new measures in the Spring Budget, however, will offer 30 hours of free childcare to parents with children aged nine months to four.
The changes are not coming into force immediately, however. The plan, at present, is to make 15 hours per week available to parents with two-year-olds in April 2024. These hours will then be made available to parents with children as young as nine months in September 2024. From September 2025, 30 hours per week will be available to parents with children aged between nine months and four years old.
Can I avoid “paying to work” for childcare?
There is no easy answer to this question, but the Spring Budget announcement does raise hope for a lot of parents. Sadly, many families will not benefit due to the delay in introducing the new system between now and September 2025. However, those who are currently pregnant or who are hoping to be in the coming years will likely want to take note of the new policy.
Naturally, couples may ask how certain it is that the new measures will be implemented. What if there is a revolt of the Government’s MPs and the measures are dropped or watered down? Is the plan likely to be dropped/changed if the Government loses the next general election (due before 25 January 2025)? After the political instability we have seen in recent years, nobody can answer these for certain. However, Labour will now be forced to revise and improve its offer on childcare to outflank the Conservatives on the left. Moreover, most backbencher criticism of the Spring Budget seems concentrated on the corporation tax rise – not the free childcare.
Bear in mind that, in 2023, childcare providers are expected to raise their prices by an average of 8%. The average nursery fee for a child under two, therefore, is likely to rise from £13,000 a year. This represents over 50% of the typical take-home pay from a £33,000 salary. Speak with your financial adviser to explore your options on how to best navigate childcare costs in light of your goals and circumstances.
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This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.