Childcare Vouchers

Ruth George Excerpts

Monday 15th January 2018 Westminster Hall

[Catherine McKinnell]

My hon. Friend makes a crucial point and I will go on to highlight that key concern. She is right that we must focus on all types of families, not just the notional two-parent family that this childcare scheme seems to benefit most.

As I have outlined, there are many downsides to the voucher scheme, which the Government cited to justify the introduction of the tax-free childcare alternative that was announced in March 2013. At that time, Ministers pledged that the new scheme would be phased in from autumn 2015 and that it would be available to families where all parents were in work and each earned less than £150,000 per year, as long as they were not in receipt of support for their childcare costs via tax credits or, when introduced, universal credit, as mentioned by my hon. Friend the Member for Ealing Central and Acton (Dr Huq). Such families would receive 20% of their annual childcare costs up to a fixed limit, which was set at £6,000 per child, so parents would receive a payment of up to £1,200 per child per year. Eventually, that would cover all children aged up to 12, or up to 17 for children with disabilities.

Tax-free childcare is entirely independent of the parent’s employer, thereby dealing with the problems associated with the requirement for organisations to be registered for childcare vouchers. The value of the support available is linked to the number of children in the family and, therefore, to the likely childcare costs rather than to the number of eligible parents.

In March 2014 the Government published the outcome of their consultation into how tax-free childcare would work. They stated that the scheme was still on track to roll out from autumn 2015; that it would be rolled out much more quickly than previously announced so that all parents with children aged up to 12 would be covered in the first year; and that they would provide 20% of support for childcare costs up to £10,000 per year per child instead of the previous limit of up to £6,000, which equates to support of up to £2,000 per child per year, or £4,000 per year for disabled children.

Crucially, the Government confirmed that although existing members of childcare voucher schemes could choose to remain in receipt of vouchers, those schemes would close to new entrants once tax-free childcare was introduced. Quite understandably, it would not be possible for parents to benefit from both.

However, the original timescale for the introduction of tax-free childcare was significantly pushed back, partly due to the unsuccessful legal challenge from childcare voucher providers who were unhappy about the way in which the contract was awarded to National Savings and Investments. That meant that the new scheme could not be rolled out until April 2017, and then only for children born on or after 1 April 2013.

Eligibility requirements for tax-free childcare also changed. Each parent must now earn less than £100,000 per year to receive the support instead of the £150,000 limit previously envisaged. In addition, to access tax-free childcare, eligible parents must open an online account through the Childcare Choices website, pay money towards their childcare costs into that account, and have those payments topped up automatically by the Government at a rate of 20p for every 80p paid in by the parent, subject to the maximum limit. Parents then allocate that money to the qualifying childcare provider of their choice and the account provider makes the payment directly to that provider.

The ability for other parties to make contributions to those accounts and for parents to withdraw money from their childcare account—minus the Government’s contributions—should they need to do so, is clearly an advantage over the childcare voucher system. However, as we all know, the Childcare Choices website has been beset by technical difficulties since it launched in spring 2017 and many parents have been unable to access their tax-free childcare account or the 30 hours of free childcare that the website also supports.

As a consequence, Ministers confirmed to the House on 15 November that tax-free childcare would be rolled out for children aged six or under on 24 November. The assumption was that it would not be available to children aged 12 and under until the end of March 2018. That anticipated schedule has changed again, however: the Chief Secretary to the Treasury confirmed this morning—coincidentally—by written ministerial statement, that the scheme will be open to children aged nine and under from today and that all remaining eligible families will be able to access it from 14 February. If all that represents a simplification of the childcare support system, I would be interested to see how the Government could make it more complicated.

In July, the Financial Times’ personal finance, digital and communities editor, Lucy Warwick-Ching, published an article, “Why tax-free childcare account website makes me want to bawl”, that succinctly summed up the situation. She commented:

“What do you get when you take one frazzled parent and sit them in front of an officious government website? Answer: confusion. Add technical glitches to the mix and that bewilderment quickly turns to anger and frustration… No matter what time of day or night I tried to sign up, things kept going wrong. Once I had found the correct web page I had multiple problems logging on.

First, I had to set up a username and password. Then HMRC set me up with a government gateway user ID (via my mobile phone and email). This is a 12-digit number which you will need every time I log in…(you will need both parents’ national insurance numbers, payslips and/or your passport details—plus details of parental employment). If you go away to look for any of these, guess what happens? The website logs you out.

The last straw was the failure of the website. Even when I had the documents to hand, it repeatedly kicked me out, citing ‘technical difficulties’ and directed me to the government helpline instead… I finally managed to sign up to the tax-free childcare account. Can I sit back and relax now? No chance. HMRC says I must ‘manage’ my childcare service account, reconfirming my eligibility (by filling in a form) every three months.

If one of its aims is to encourage parents to stay in work, the new system appears to fall woefully short. Without rapid improvement, it risks becoming another chapter of disappointment in the saga of digital government.”

Crucially, the author highlighted that it is not possible to avoid those issues by signing up via post or over the phone; it must be done online. That leads me to ask the Minister: how many parents eligible to receive tax-free childcare will be prevented from receiving that support because they do not have easy, regular, and—crucially, given the type of data being provided—secure access to the internet?

When I was a member of the Finance Bill Committee in 2014, alongside my hon. Friend the Member for Stockton North (Alex Cunningham), I asked the then Exchequer Secretary to the Treasury, the right hon. Member for Witham (Priti Patel), how many families would lose out as a result of that requirement. I received the answer that the Government estimated that as many as 9% of those eligible—up to 200,000 parents—did not have access to the internet, and therefore would be unable to receive tax-free childcare. Will the Minister set out whether that figure has changed and, if not, explain what the Government intend to do about it?

Concerns around the tax-free childcare scheme are not restricted to its digital woes but include the inescapable fact that it provides the greatest benefits to families who can afford to spend the most on childcare, because it is effectively linked to parents’ expenditure rather than income. That could mean that some families, such as a lone parent of two disabled children with high childcare costs, receive more support than under vouchers, which I strongly welcome, or that a couple earning a joint income of £195,000 receive £2,000 towards the costs of their childcare.

As the CVPA has pointed out, the way that tax-free childcare is structured means that it disproportionately favours wealthier families living in London and the south-east, who are more likely to have higher childcare costs and be higher earners. Tax-free childcare provides the same rate of saving on childcare costs irrespective of income—whether a family earns £240 per week or just under £200,000 per year.

[Ruth George (High Peak) (Lab)]

I must declare an interest, as my husband and I both claimed childcare vouchers when our two children were young, after I had gone back to work and needed to support our children through childcare while on a very average wage. I certainly would not have been able to do that without childcare vouchers, and I know from working with retail workers in Tesco and the Co-op, who also have access to childcare vouchers, that they are in the same boat. Does my hon. Friend agree that in order to keep women in work it is very important to allow the voucher scheme to continue?

[Catherine McKinnell]

My hon. Friend makes the point very well, because ordinary working families are more likely to be better off using childcare vouchers than using tax-free childcare. The vouchers are tapered, so that basic rate taxpayers save more than higher rate taxpayers, who in turn save more than additional rate taxpayers. Also, as we have already touched upon, lower-income families can benefit from accessing childcare vouchers alongside other forms of support for working families, including working tax credits and universal credit, while those using tax-free childcare cannot.

Crucially, tax-free childcare requires all parents in the family to be in work within each three-month qualifying period, meaning that any change in circumstances, for example one parent leaving work to care for an elderly relative, results in the family losing all eligibility for childcare support. That is not the case with childcare vouchers.

So how popular is tax-free childcare proving? The Office for Budget Responsibility has previously estimated that the tax-free childcare case load would reach 415,000 by October 2017. Instead, the case load was just 30,000 by that point. We were informed in today’s timely written statement by the Chief Secretary to the Treasury that the figure now stands at 170,000, which is still well below half the number forecast by the OBR for October last year. It would be helpful to have an explanation from the Minister about the ongoing issues with take-up of this flagship policy. I would be particularly interested to know what proportion of eligible self-employed parents have registered for tax-free childcare to date, given that an increase in uptake is one of the main reasons cited for moving to the new system.

When I challenged the Chancellor on the uptake in the Treasury Committee shortly after his autumn Budget, he said:

“There have been some IT issues around the early rollout of the programme. It is in a much better place now. The Government have not yet conducted a paid-for advertising campaign to raise awareness of the tax-free childcare programme. We are doing social media advertising, but not a wider paid-for programme. There will be such a programme in the new year, and we expect that to increase registrations and use of the programme.”

Tellingly, he went on to say that

“it is also the case that the childcare vouchers scheme closes to new entrants in April next year. Once that scheme closes, because the tax-free childcare scheme will then become the most attractive scheme available to parents, we expect that that will increase the level of interest and take-up of the scheme as well.”

He also said:

“The voucher scheme is closing next year, and we expect that uptake of the tax-free childcare scheme will then increase. At the moment, they are alternatives to each other. There will be one route available.”

In other words, the Government accept that the only way to make tax-free childcare more attractive than the childcare vouchers scheme is to close the childcare voucher scheme to new entrants, forcing people to register for tax-free childcare instead.

In conclusion, this debate could perhaps be best summed up by early-day motion 755, which was tabled earlier this month by the hon. Member for Brighton, Pavilion (Caroline Lucas) and has now been signed by around 50 hon. Members, including myself. It states:

“That this House notes that childcare vouchers are a widely-used benefit that are popular with parents and employers alike, with more than 60,000 businesses of all sizes offering vouchers to more than 750,000 parents; further notes that, with childcare costs having risen faster than incomes in recent years, a large majority of parents still find their decision to work dependent on the availability of good quality, affordable childcare; regrets the Government’s decision to close childcare vouchers to new entrants from April 2018; is concerned that the lack of any formal role for employers in the new Tax-Free Childcare scheme will lead to falling levels of engagement by employers in the support of working parents around their work-life balance and childcare needs; calls on the Government to keep childcare vouchers open alongside Tax-Free Childcare, so that parents can choose the scheme that is most suitable to their needs and offers the most support to their family; and further calls on the Government to consider how childcare vouchers could be extended to the self-employed.”

Like the instigators of the petition, the early-day motion is not arguing against tax-free childcare; it simply calls on the Government to allow childcare vouchers to co-exist alongside tax-free childcare for new entrants and existing recipients alike, to enable families to make a choice about the form of childcare that best suits their individual circumstances and their families’ needs, and that is a call that I support.

--- Later in debate ---

[Ruth George (High Peak) (Lab)]

I thank my hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) for introducing this important debate, and all the people who set up and have supported the petition on childcare vouchers. I have been making this argument to hon. Members and Ministers for several years now, since tax-free childcare was first proposed. At that time I was working for the Union of Shop, Distributive and Allied Workers, and was responsible for speaking to employers about childcare vouchers. Many members of their staff benefited from the vouchers, particularly those looking to increase their level of seniority from that of a shop-floor worker, paid an hourly wage and often better off claiming tax credits, by stepping up into a management role that required much more flexibility in terms of hours. In retail, 24/7 flexibility is often required to undertake even a junior management position, so childcare is a very important factor in those decisions that are so important for parents’ social mobility and for ending child poverty in so many families.

At the moment, when parents do the sums, it all comes down to the basic family economics of whether it is worth taking an extra job. For too many parents—those who do not have access to childcare vouchers and can claim only the lower rate of relief available under tax-free childcare—taking on a junior management position paid between £18,000 and £20,000 per year is simply not worth their while. That sort of decision stops people, particularly women, single parents and second partners in a couple, increasing their family incomes, their prosperity and that of their children.

The difference between childcare vouchers and tax-free childcare—relief can be obtained at 32% under childcare vouchers, with national insurance relief as well as tax relief—is key for the majority of parents when it comes to childcare costs. As my hon. Friend the Member for Newcastle upon Tyne North said, each family can claim for costs of up to £243 a month per parent—£2,900 per year of childcare costs in a one-earner family, or up to £5,800 in a two-earner family, where the relief is at 32% under the childcare voucher scheme. Under tax-free childcare, someone may be able to claim for costs up to a higher amount, but at the lower rate of 20%.

Families with one earner are better off under childcare vouchers if their childcare costs are less than £4,660 per year, which the vast majority are, because the average cost of childcare is, I think, £3,796 per year. Two earners who can both claim vouchers, with childcare costs of up to £9,320 per year, will still be better off under vouchers than tax-free childcare. The vast majority of parents will therefore be better off under childcare vouchers. It is true that some people, such as those who earn a much lower rate—those people will be better off under tax credits, or universal credit as it will be—and those who have significantly high childcare costs may be better off with tax-free childcare. However, anyone paying childcare costs of more than £9,300 per year will also be earning a significant amount.

In the current economic climate, it is particularly important that childcare vouchers are kept on, for three key reasons. First, we have seen childcare costs increase by 48% since 2008—seven times the rate at which wages have gone up. The basic economies of scale regarding whether someone can stay in work within a family and still pay for childcare have simply gone, because the costs have increased so much. It is therefore important that they can receive the higher rate of relief on the costs they pay.

Secondly, there has been reduced eligibility for in-work support since the 2010 emergency Budget, which froze working tax credit, and child tax credit rates since the Welfare Benefits Up-rating Act 2013. Whereas a family with one child could claim tax credits up to an income of about £24,000 per year three years ago, it is now down to £22,800 per year. Under universal credit, the threshold will be £15,100 per year, above which people will not be able to claim universal credit. There is a huge group of families earning between about £15,000 and £22,000 per year that used to be able to claim in-work support, who did not need childcare vouchers and childcare support. Such support will now become crucial, enabling those parents to stay in work and to get a necessary reduction in the costs of their childcare.

Thirdly, there are the rising levels of child poverty and in-work poverty. The Child Poverty Action Group predicts that by 2020 an extra 1 million children will fall into poverty due to the reduced levels of support under universal credit. I would have thought that now more than ever it is crucial that the Government do all they possibly can to support families on low to middle incomes, to enable them to stay out of poverty and to give their children the best start in life. I therefore ask the Minister to please keep open the childcare voucher scheme that enables so many families to do that.

--- Later in debate ---

[The Economic Secretary to the Treasury (John Glen)]

I am pleased to serve under your chairmanship, Mr Pritchard. I thank everyone who signed the petition and made their views heard. I understand that the petition has attracted more than 115,000 signatures, which goes to show the importance of the Government’s support for childcare costs. This is a key issue, and we have had a thorough debate. Seven Members made very full and thoughtful contributions, and I will respond to as many of their points as I can.

For many parents, being able to afford good-quality childcare is essential to working and supporting their families, so it is right that we have this debate. I am responding to the debate rather than the Minister with responsibility for childcare because tax-free childcare and childcare vouchers operate through the tax system. The Government have introduced tax-free childcare, which will benefit more than 1 million working households and mean that parents are eligible for up to £2,000 per child per year to help towards childcare costs.

[Ruth George]

Will the Minister give way?

[John Glen]

No, I want to make some progress. The hon. Lady can come in—

[Ruth George]

I have just a quick question.

[John Glen]

Let me make my introductory remarks, and then I will give way.

Let me draw Members’ attention to the three key reasons why we support the replacement of childcare vouchers with tax-free childcare. First, the Government believe that childcare vouchers are unfair. Tax-free childcare is fairer and better targeted than the voucher scheme. For example, only about 5% of employers offer vouchers, which limits their reach to about half of working parents, not to mention that self-employed parents are completely excluded from the scheme, which pays no regard to the number of children in each family and disadvantages lone-parent families.

Secondly, tax-free childcare has a broader reach. It is open to all working families with children aged under 12 that meet the earnings criteria. That ensures that families who were excluded from childcare vouchers can be brought into tax-free childcare, and benefits families with the highest childcare costs—namely, most of those with young children.

Thirdly, tax-free childcare is simpler to use—I will come to the IT issues that Members raised. Employers usually pay third-party providers to administer childcare voucher schemes. The Government do not believe that paying third-party providers is a good use of taxpayers’ money. Some £220 million has gone on such administration since the scheme began. A voucher scheme is therefore an ineffective way of delivering support to families. Under tax-free childcare, parents manage their own accounts online. The case for change is clear, as it was to the Labour party when it announced at its 2009 conference, when it was in government, that the existing system would be shut down.

I will now happily give way to the hon. Lady.

[Ruth George]

I thank the Minister for giving way. I was simply going to ask about his earlier comment that 1 million families will benefit from tax-free childcare. Is that the number who will benefit in comparison with having no support with childcare at all, or does it take into account the approximately 550,000 families who would actually be better off under vouchers than under tax-free childcare?

[John Glen]

Clearly, in any benefit system there will be those who are better off and those who are not better off, but the bottom line is that the current system prevents large numbers of parents from accessing childcare support. That is why we are making the change.