100,000 families will lose out in coalition’s childcare shake-up

The planned shake up of child benefit system will affect families and their incomes, new research by The Children's society shows. Is it time for a re-think?


The introduction of Universal Credit means big changes to childcare support for working families, but help for some of the poorest could be cut by thousands of pounds, writes Dr Sam Royston, poverty and early years policy adviser for The Children’s Society

The government has promoted its changes to childcare support under Universal Credit as a major improvement to the existing system by extending support to those working under 16 hours per week. However, as always, the devil is in the detail.

In this case, the problem comes from a change which means 100,000 of the UK’s lowest-income working families, who depend on childcare support to make work pay, stand to lose out under the new system.

Currently, many working families can get two forms of support with childcare costs through the benefits and tax credits system, via:

Working Tax Credit:

This covers up to 70% of childcare costs up to a maximum of £175 for one child, or £300 for two or more children;

Housing Benefit and Council Tax Benefit:

Childcare costs are excluded from household income for the purposes of calculating entitlement. This means a household with childcare costs may be entitled to a higher rate of Housing Benefit and Council Tax Benefit than one with equivalent earnings but no childcare expenses.

The support through Housing Benefit and Council Tax Benefit is worth up to an additional 26% of childcare costs on top of the 70% covered through tax credits. This means that, in total, some families can receive up to 96% of their childcare costs through the benefits and tax credits system.

Under the government’s current proposals, Universal Credit will only cover 70% of childcare costs up to £175 for one child or £300 for two or more children.

For households that currently only receive help with childcare through Tax Credits, the change will make no difference. They will continue to receive 70% of childcare up to the same limits. But the loss of additional support through Housing Benefit, and potentially Council Tax Benefit, means families currently receiving the extra childcare support would lose out substantially.

Families like these stand to lose as much as £4,000 a year in help with childcare costs under Universal Credit, which could mean the difference between making work pay and finding employment unsustainable.

What is most worrying about this is that, because Housing Benefit is targeted towards those on the lowest incomes, it is the very poorest working families that will be affected. In fact, families receiving support with childcare costs through Housing Benefit are four times more likely to be living in poverty than those receiving childcare tax credits, but not on Housing Benefit.

As indicated in our map, families in the South of England are more likely to be affected than elsewhere. This is likely to be because the South of England has the highest average rents and Housing Benefit awards (meaning families on equivalent incomes are more likely to receive help with childcare through Housing Benefit).

This change undermines the fundamental principle behind introducing Universal Credit – to provide more support for the poorest working families. It is supposed to make sure they are able to make work pay, but in reality it could end up forcing some parents out of work because they can’t afford childcare. To see what this means in pounds and pence, see our Childcare Cost Calculator.

With the details of Universal Credit being debated and voted on this autumn, the government urgently needs to reconsider how it can best focus support with childcare costs under the new system. It needs to invest more money to make the system work. Raising the childcare element of Universal Credit from 70% to 80% would help to address the problem and ensure work for the poorest families always pays.

According to the government’s own statistics, 100,000 families, about 20% of those receiving help with childcare through the tax credits system, depend on this additional support; for the full report, see “The Parent Trap: Childcare cuts under Universal Credit (pdf)

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