Mike Brewer from the Institute for Fiscal Studies published a cogent note on Tuesday about the UK government’s “tax-free” childcare. It echoes some of the points I tried to make yesterday about the changes, namely that they are broadly sensible but there is no firm evidence to say that they will do what they are supposed to do, i.e., increase the number of parents in work. There is a big risk that simply subsidising demand will translate into higher sticker costs for parents since the supply side of the market is not working as one would hope of a competitive sector. This is without getting to the argument of whether we should think of nurseries as a market in the first place.
But Mr Brewer makes another important point. A household is eligible for tax-free childcare if the parent(s) are both working and neither receive financial support through working tax credits, or in the future, Universal Credit. What do you need to do to be classified as “working” and therefore ensure that your family gets up to £2,000 in support for childcare? You need to self-certify that you earn £50 per week. No income tax or national insurance is paid at this rate, so it would be hard for HMRC to check. “There will also be a very large incentive for some second earners to claim that they are earning that much: it could be worth thousands of pounds in childcare subsidy”, Mr Brewer writes.