Our response to the government’s childcare proposal:

In the UK parents currently receive help with their childcare costs through free early education, the children element of Working Tax Credit and employer-supported childcare vouchers. The amount of help that parents receive was increased in the last Parliament and as a manifesto commitment the Conservatives announced that they would be increasing the hours of free early education for working parents with three and four-year-olds.

The Family and Childcare Trust welcomes the new government’s decision to extend the number of free hours for three and four-year-olds to 30 hours a week by 2017. This is really good news for working parents in England whose childcare costs will reduce significantly after their children pass their third birthday.

The Family and Childcare Trust looks forward to working with the government on the detail behind this extended free entitlement, and to help implement this ambitious programme.

What is needed to make childcare more affordable:

1. Funding for free early education

The Government’s plans to extend the hours of free early education will require an expansion of nursery and pre-school provision in the maintained, private and not-for-profit sectors. Presently, 66 per cent of thee year olds and 24 per cent of four year olds receive their hours of free early education in the private and not-for-profit sectors.  Private childcare providers have already voiced their concerns over under-funding and we have sympathies with them. It is essential that providers receive enough revenue to deliver high quality early years education, as it is only good quality provision that helps narrow gaps between more disadvantaged children and their peers. Providers will also need capital funding in order to expand existing provision or set up new nurseries. The Government has recognised this and committed itself to reviewing funding formulae. We think there are improvements that are needed both to revenue and capital funding mechanisms to enable places to be expanded.

Currently, in England, central government allocates money to local authorities for free early education through the Early Years’ Block of the Dedicated Schools Grant. The local authority’s Schools Forum then allocates the money to private, not-for-profit and public sector providers with the help of a local formula. All Schools Fora must allocate extra money on the basis of deprivation. On top of the basic rate per child and within an overall set budget they also have three optional criteria to determine extra funding, namely:

• The flexibility of provision, for example, if it is spread over the whole year
• The quality of provision, with high quality settlings sometimes given more funding to incentivise improvements
• Business sustainability with new or small settings granted more money

How a Schools Forum decides to allocate its money varies considerably between local authorities. This can lead to large differences in hourly funding rates for providers, within and between local authorities.

Three and Four Year Olds

For three and four year olds, the funding level from the Department for Education is largely determined by historical precedent. From April 2015 providers will get a £300 Early Years’ Pupil Premium per child where they are providing early education for specified groups of disadvantaged children. But there are big disparities in the money from the government, which range between £9.17 per hour (Camden) to £3.24 per hour (Solihull). The average rate in England is £4.51 per hour. Even in London there is big variation and the lowest rate from the DfE to local authorities is £4.10 (Barking and Dagenham).

There are further differences in the way that local authorities channel money to providers. The average hourly rate to private and not-for-profit providers is £3.96 per hour in England. Camden only passes on £5.04 out of its £9.17 per hour allocation to private and not-for-profit providers as it uses most of its money in the public sector. The highest amount from local authorities to private and not-for-profit providers is £6 per hour (City Of London) and £5.23 per hour (Bradford), with Bradford getting £5.19 allocation from the DfE, with other parts of the budget cross-subsidising early education. The lowest amount for private and not-for-profit providers is £2.93 per hour (Tower Hamlets) out a DfE allocation of £8.21 per hour. The difference between Bradford and Tower Hamlets amounts to £1,311 per year for private and not-for-profit providers, which can affect quality and profitability and the ability for providers to expand.

Two year olds

For two year olds, the rate that local authorities get from the Department for Education is fairer and more transparent. Local authorities get a flat hourly rate per child (£4.85), supplemented by an area cost adjustment in places where wages are higher. Local authority Schools Fora then decide how much money they will distribute to individual early education providers.

Our calls to action:

• Family and Childcare Trust believes that reform is needed to early years’ funding. For two year olds there is a need to review the funding formula to make sure that it meets the costs of providing high quality early education in expensive areas such as London. For three and four year olds, more extensive reforms are needed to ensure the money is spent fairly and effectively. The Government also needs to allocate enough capital funding to the number of places, and ensure that this money reaches providers quickly.
• “A funding review is also required for childcare for children who have disabilities, with 41 per cent of three and four-year-olds in this group currently not accessing the full 15 hours a week of free early education they are entitled to.
• Although the proposals on increased hours are only for England, we hope that the devolved administrations will use the extra funding they receive (through Barnett formula allocations) to extend free early education to working parents in Northern Ireland, Scotland and Wales. 

2.  Flexibility of free early education

Alongside free early education, parents currently also get help with their childcare costs through childcare element of Working Tax Credit and employer-supported childcare vouchers. These schemes apply to all parts of the UK, and are important for helping parents of 0-3s and school-age children.

At present working parents on low incomes can receive up to 70 per cent of their childcare costs through the childcare element of Working Tax Credit, up to a maximum cost of £175 per week for one child (meaning the parent gets 70 cent of this = £122.50). There is a limit of £300 per week help for two or more children (= £210 per week towards childcare). Some 8 per cent of families get this help, predominantly single parents.

Working Tax Credit is now being merged into Universal Credit. In April 2016 the level of childcare support through Universal Credit will be increased to 85 per cent of costs, up from 70 per cent of costs that parents receive today.

At present parents not in receipt of tax credit help with childcare costs are entitled to help with their childcare costs through employer-supported vouchers and tax relief on workplace nursery costs. An estimated 9 per cent of UK parents receive help with their childcare costs through employer-supported childcare schemes, most usually as vouchers, either as an additional benefit on top of their salary or as a salary sacrifice before they pay tax. But not all employers offer vouchers and some childcare providers do not accept them. It is for this reason that the Government has decided to phase out childcare vouchers and replace them with the online Tax Free Childcare scheme from late 2015. 

Tax Free Childcare

• Tax-Free Childcare will be open to parents who do not receive tax credits or the new Universal Credit and who work 8+ hours a week (including self-employed) and who pay for Ofsted-registered childcare for a child under the age of 12 (or 16 if the child is disabled).
• Eligible families will get 20 per of their annual childcare costs paid for by the government up to a maximum of £500 per child per quarter.  The annual upper income limits is £150,000 for a single parent and £300,000 where both parents work.

Complexity

This means that from the end of 2015 there will be four different ways to get financial support: Working Tax Credit, Universal Credit, existing employer-supported vouchers and the new tax free childcare scheme. There are also smaller schemes to help students and young parents.

• The childcare support system contains lots of ‘cliff edges’ that can disincentivise work or taking on extra hours. These cliff edges affect families in the £30,000-£40,000 income bracket most of all, as they will get 85 per cent of childcare costs met under Universal Credit, but just 20 per cent if they cross an income threshold and get Tax Free Childcare. Making the right decision is crucial.
• The system is so complex that some 335,000 families could lose up to £500 a year if they chose the wrong system of support. (The Childcare Support Gap, 2014, Family and Childcare Trust)
• Those most affected will be families whose income fluctuates, such as the self- employed, temporary workers, those who rely on commission, and those on zero hours contracts – all are hard working families.

Our calls to action:

• We want Government to review childcare funding, with the view to introduce a single funding system for help with childcare costs, making sure that families on low and middle incomes get the most help with their childcare costs.  
• The Government should run a national campaign to inform parents about help with childcare costs.
• The Government should align criteria for receiving the childcare element of Universal Credit with the tax free voucher and raise the maximum age of eligibility for disabled children to 18.

In the long-term we want to see an independent review of childcare. This should in the log-term aim to create a simple system that promotes quality, supports parents and delivers for children.