A new report by researchers at the Centre for the Analysis of Taxation (CenTax) [1] provides the first independent assessment based on real-world data [2] of the impact of the £100,000 cut-off for entitlement to free childcare.
The analysis found that in 2022 [3], the most recent year for which data is available, around 1,100 parents of 3- and 4-year-olds held their income just below £100,000 specifically to avoid the threshold, but this figure stands to grow dramatically by the end of this parliament.
Accounting for the extension of free childcare to 9-month-olds from April 2024 [4] and the growing number of taxpayers whose incomes exceed the threshold, the report estimates:
- By 2030 there will be nearly 12,000 parents holding their incomes down to avoid the threshold – an eleven-fold increase on the number observed in 2022.
- In 2022, the median affected parent would have had to earn roughly £105,000 to be no worse off after losing childcare, but this will rise to £124,000 by 2030.
- The cliff-edge disproportionately affects women. In cases where one partner leaves the workforce to care for a child, in 9 out of 10 cases it is the mother.
The report also identifies the impact of the current policy which currently relies on parents’ expected rather than actual Adjusted Net Income (ANI):
- Strikingly, one third (33%) of parents whose incomes were between £100,000 and £120,000 at the end of the year nevertheless claimed and received free childcare.
- While this does not necessarily indicate non-compliance, since the formal test is based on expected ANI, it does mean that parents who ultimately have the same incomes end up with different access to free childcare.
The report estimates that the cost of completely removing the threshold for the free childcare entitlement would be around £640 million in 2030. However, the researchers set out several cheaper options open to the Government short of fully removing the cliff-edge:
- A threshold based on actual rather than expected ANI could be set at £111,000 with no additional fiscal cost.
- A more limited measure that extends only the universal 15 hours free childcare to under-3s would cost around £210 million in 2030.
- Raising the threshold to £125,000 would cost around £100 million in 2030.
- A taper that deducted 28 pence from the entitlement for each pound earned over £100,000 would be better for parents than the current cliff-edge while approximately revenue neutral, raising around £20 million.
Arun Advani, Director of the Centre for Analysis of Taxation (CenTax) and Professor of Economics at the University of Warwick said:
“Our analysis shows the childcare cliff-edge stands to grow dramatically by the end of this parliament, but there are solutions available to the Government – including the opportunity to prevent parents whose incomes exceed the threshold from claiming free childcare.”
Jack Pepin-Hall, Research Economist at the Centre for Analysis of Taxation (CenTax) said:
“If the Government chooses to keep an income test for free childcare, it should at least be based on parents’ actual reported incomes instead of what they claim they expect their incomes to be. As well as being fairer, this change would enable the Government to raise the threshold to just over £110k at no extra cost overall.”
ENDS
Notes to Editors:
- The Centre for the Analysis of Taxation (CenTax) is an independent research centre dedicated to improving public understanding of tax policy and helping to design a better tax system. This research was funded by the Nuffield Foundation (WEL/FR000023787). Additional funding was provided by the University of Warwick and ESRC (ES/X004635/1).
- The report uses HMRC administrative tax data to directly observe parent responses, providing the first estimate of the cost of reform using real data.
- All analysis is conducted based on tax years. For example, 2030 refers to the 2029/30 tax year.
- Since 2010, all parents of 3- and 4-year-olds in England have been able to claim 15 hours a week of free childcare funded by government for 38 weeks of the year. Since 2017, working parents of 3- and 4-year-olds have been able to claim a further 15 hours, provided that certain conditions are met. These include the requirement that neither parent expects to have income above £100,000. Starting in April 2024, this entitlement has been gradually expanded to cover a wider range of ages. Working parents of children aged 9 months to 2 years old are now eligible for 30 hours per week of free childcare. Parents of under-3s therefore lose 30 hours of free childcare by crossing the threshold, rather than the 15 hours that parents of 3- and 4-year-olds lose.
- The full report, Removing the £100,000 childcare cliff-edge: Impacts and cost of reform, authored by Arun Advani, Josh Flew, Jack Pepin-Hall and Andy Summers, is published by CenTax and is available at https://centax.org.uk/removing-the-childcare-cliff-edge-impacts-and-cost-of-reform/.
- This work contains statistical data from HM Revenue and Customs (HMRC) which are Crown Copyright. The research data sets used may not exactly reproduce HMRC aggregates. The use of HMRC statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis of the information.
