Since the latest expansion of taxpayer-funded childcare in 2024, families with young children in which both parents earn less than £100,000 a year can be entitled to 30 hours a week of care - or none at all, if one of them cross that threshold.
In a report, researchers from the Centre for Tax Reform (CenTax) said that, by the end of this parliament in 2030, the average parent crossing this “cliff edge”, will have to earn £124,000, to be no worse off after losing their free childcare.
Arun Advani, director of CenTax, 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.”
The researchers find that “bunching” of incomes just below the threshold suggests that even in 2022 – the latest year for which data is available – about 1,000 families were artificially suppressing their earnings to avoid falling foul of the threshold. That could rise to almost 12,000 by the end of this parliament.
The thinktank, based at Warwick University, also suggested the policy may be incentivising some mothers to drop out of work. Below the £100,000 threshold, 6% of lower-paid partners – usually the mother – are out of work; but above the threshold that rises to 9%.
“The jump in non-working mothers at the point where their partner exceeds £100,000 income suggests the loss of childcare entitlement as a cause, with possible long-term consequences for those mothers’ earnings,” the report said.
CenTax also criticised the fact that the threshold is based on how much parents expect to earn in the year ahead – pointing out that some families appear to be claiming it, despite eventually earning more than £100,000.
It proposes several potential solutions. Restricting free childcare to 15 hours to families above the £100,000 threshold, instead of withdrawing it altogether, would cost £210m by 2030, it said.
Gradually tapering away the entitlement at 28p for each £1 earned above the threshold would be revenue neutral, but less problematic for parents, it adds.
Healey is set to deliver his first budget on 28 October, against a backdrop of renewed fears about higher inflation and febrile global bond markets.
In his first major speech in Coventry on Monday, Healey promised to put growth at the heart of his approach; but also warned that Labour must “be honest” about the constraints on public spending in the years ahead.
Since taking over as Labour leader in July, Andy Burnham has announced a VAT cut on electricity bills and capped bus fares; but Healey has also suggested the government is keen to do more to give hard-pressed consumers a “breathing space”.