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The Progressive Policy Think Tank

Chancellor urged to rethink childcare tax relief idea

IPPR makes case for universal childcare service

Writing in 'Nursary World' magazine today, IPPR Director Nick Pearce, says:

You can usually tell when a government is gearing up to announce a new policy by the fact that some smart, loyal and upcoming backbenchers begin making arguments for it. These backbenchers are not stupid. They don't want to say anything out of line. Instead, they want to say things that prepare the ground for a government policy shift whilst they get ready to take their first steps up the Ministerial ladder.

This is what's happening ahead of George Osborne's March Budget on tax relief for childcare. The government is acutely aware that it has little to say to families who are feeling the squeeze on their living standards, other than it will all be worth it in the end. It is particularly worried that it is losing support amongst women voters. Offering families more help with childcare costs looks like a good bet.

On cue, smart backbenchers have been advancing arguments for childcare reform.  Liz Truss MP has been advocating deregulation of childcare and nursery education, whilst Harriet Baldwin MP has been making the case for extending childcare vouchers to the self-employed.  Newspapers have reported that the Chancellor is sympathetic, picking up on briefings from last year's Conservative Party conference that the government wants to extend tax relief to all childcare costs.

You can see the appeal. Hard pressed middle class professionals could a tick to a new box on the tax self-assessment forms for childcare costs. Put in the Ofsted registration number, supply the receipts, and cut your tax bill in half. Alternatively, the self-employed, small business owners and freelancers could apply for childcare vouchers to set against their tax and National Insurance bills, just like employees in companies offering salary sacrifice schemes. It all seems so obvious and fair: if I can claim for a laptop as a business expense, why not the nanny?

But it doesn't take much thought to understand why this would be a bad use of taxpayers' money. By definition, schemes that offer tax relief give most to those who pay most tax. They favour the better off. That's why pension tax relief for higher and top rate taxpayers is so regressive: it gives billions to the better off to invest in their pensions, whilst everyone gets proportionately half as much, or none at all. How can this be justified when support for childcare costs in the tax credit system are being cut? Low and middle income families stand to lose up to £1,300 a year from these changes when they take effect in April. Is this money simply to be transferred to tax relief for families higher up the income scale?

The better option would be to give everyone a stake in a new, universal childcare system. Abolish tax credits and tax reliefs and roll it all up, with extra spending from cuts to higher rate pension tax relief and pensioner freebies, into a new universal childcare programme. That's the Nordic way and it pays for itself in higher female employment and high quality child development.

Notes to Editors

Income tax and NICs forgone on employer-supported child care provided through vouchers are estimated to cost the Exchequer £550 million in 2011-12.

A breakdown of amounts of income tax and NICs (including employer NICs) forgone in 2011-12 for employees in different rate bands in respect of child care vouchers is available from the IPPR press office.


Richard Darlington: 07525 481 602 / [email protected]

Tim Finch: 07595 920 899 / [email protected]