Tens of thousands of parents on low incomes face having to pay to return to work, as childcare costs and the universal credit taper, alongside income taxes can create an ‘effective marginal tax rate’ of over 100 per cent, according to a new report by the IPPR think tank.
The complex and incomplete patchwork of childcare entitlements, benefits and allowances for working parents in England leaves many struggling in the face of spiralling childcare bills – with costs often outstripping potential earnings, especially for those receiving universal credit, the report says.
For example, in a two-parent family with a one-year-old, a low-paid second earner whose partner is on minimum wage could face ‘effective marginal rates’ as high as 130 per cent, meaning the household can become substantially worse off financially from increasing their hours . Researchers argue that rising childcare costs as parents increase their hours amount to a tax on workers.
Steep childcare costs also pose a challenge to higher-earning families, with parents of young children returning to the workforce facing effective marginal tax rates as high as 93 per cent as they step up their hours, where the partner earns minimum wage and has typical childcare costs.
The report points out that there are seven different childcare support schemes that hard-pressed parents need to navigate as they attempt to juggle the demands of work and family, while also trying to make ends meet. Parents interviewed by researchers for the report described the system as a “minefield” and a “complete nightmare”, and one described feeling guilty for looking forward to her child growing older, when their financial situation would be made easier by access to funded childcare.
Rachel Statham, IPPR associate director and lead author of the report, said:
“Parents and carers are facing a complex, patchy and costly set of childcare offers. As the cost of living crisis pushes more families into financial stress, rising childcare costs are increasingly unaffordable – and risk pushing parents of young children out of the workforce altogether.
“We urgently need reform to simplify and expand childcare provision. It’s time for a childcare guarantee to lower barriers for parents getting back into or getting on in work, to reduce costs for families with children, and to ensure every child has access to high quality early years education.”
Henry Parkes, IPPR senior economist and the report’s co-author, said:
“Childcare in England isn’t working – for children, parents or providers – while soaring inflation is only making a bad situation worse. Costs are already the second highest in the developed world as the average family have to pay over £7,000 a year for just part time care for a child under two.
“On top of this, the current childcare system has now created an environment which disincentivises parents from work. In the midst of a cost-of-living crisis, it is nonsensical and impractical to have families who are worse off in employment. You should not be worse off from working more. The system needs change.”
