- Tax free childcare plans were unveiled by former Chancellor George Osborne at the March 2013 Budget
- Much-maligned policy was due to be phased in from Autumn 2015 but was delayed till 2017
- Government expenditure is 75% lower than forecast by the OBR when Tax Free Childcare accounts opened
- Chancellor under pressure to provide support for families facing spiralling childcare costs
“Former Chancellor George Osborne first announced plans in March 2013 to support an estimated 2.5 million families with the cost of childcare through an eye-catching ‘Tax Free Childcare’ plan,” says AJ Bell head of personal finance, Laura Suter. “Wind the clock forward a decade, however, and today’s Treasury occupants find themselves with a failing policy and a clamour to provide more support for parents facing spiralling costs.
“At 2013’s March Budget the then Chancellor George Osborne announced plans to introduce Tax Free Childcare, promising a 20% subsidy on childcare fees – equivalent to the basic rate of income tax - worth up to £1,200 per child*. The much-maligned policy, originally planned for a 2015 rollout, was postponed until 2017 during a period of consultation and a legal challenge over the decision to run the accounts through NS&I.
“Despite the lengthy consultation period, the final policy was so confusing for many parents that uptake has been limited. Lots of parents aren’t aware of the scheme, don’t understand how it works or don’t realise they are eligible and miss out on the invaluable support as a result.
“As the March 2023 Budget approaches, Chancellor Jeremy Hunt is under increasing pressure to introduce more support for parents struggling with eye-watering childcare costs. Yet the existing government policy, which operates alongside the 30-hours free childcare available for three and four-year-olds, is failing to deliver.
Government outlay 75% lower than projected
“The OBR in March 2017 estimated £1bn a year in government funding would be landing in Tax Free Childcare accounts by 2021-22, providing significant support to parents to help cover the cost of nursery, after school clubs and childminders. In total, it anticipated the government would shell out £4bn over the first five years the Tax Free Childcare accounts were in circulation.
“The reality has been quite different. It quickly became apparent uptake was far lower than expected and the estimated spend was lowered dramatically. According to the latest available data, the government has actually only spent a little over £1bn in total - 75% below the £4bn outlay initially expected by this stage.
“Although uptake has been improving gradually, the annual outlay is still well under half what the OBR projected. While the pandemic furlough scheme meant there was less need for childcare in 2020 and 2021, the number of families using the scheme remains far lower than it should be.
Source: AJ Bell analysis based on OBR March 2017 fiscal and economic outlook and HMRC tax free childcare statistics
Why is uptake so low?
“One of the biggest issues with Tax Free Childcare is its unhelpful moniker. Research commissioned for HMRC shows that the name does little to help people understand who is eligible, or when and how they claim.
“People find the very thought of ‘tax’ quite taxing, so describing something as ‘tax free’ is especially problematic when it isn’t obvious to many people exactly which tax is being alleviated and how. The label also fails to explain clearly who is eligible. It doesn’t mention parents or how much support is available, unlike the ’30 free hours’ scheme which, for the most part, does what it says on the tin.
“Combine that with the fact that you need to go through the process of setting up a government account to claim the benefit, and that you have to renew your claim four times a year to get up to £500 each time, Tax Free Childcare succeeds in being both difficult to understand and a pain to actually claim.
Chancellor under pressure
“There is a clamour for the Chancellor to do more to support families with childcare costs. Many households are spending more on childcare than they are on their mortgage or rent, while others are effectively priced out of going to work, with 65% of parents not in work blaming the high cost of childcare, according to a recent report supported by backbench Conservatives.
“Meanwhile, industry lobby groups are calling for the government to overhaul the childcare system to help get people into work. It means the Chancellor is under pressure to take steps to help parents, although it is unclear what shape that could take. Options include extending the free childcare hours scheme to younger children or increasing the number of free hours available. Tax Free Childcare could be rebranded in an effort to boost uptake, although after 10 years of struggle the government may simply decide it is better to go back to the drawing board.
“Introducing a new form of support comes with its own challenges though. Government would need to implement any system quickly enough to make a difference to households fighting a cost of living crisis, and a new scheme risks exacerbating the problem by adding yet another thing into the mix for already-confused parents to get their head around.”
*March Budget 2013: ‘…The Government will support working families with 20 per cent of their childcare costs up to £1,200 per child per year. This new system will be phased in from autumn 2015…’
