Jeremy Hunt’s free childcare scheme is facing criticism due to a tax-trap that affects parents earning over £100,000.
The Institute for Fiscal Studies has described the situation as “absurd” and warns of the “severe distortions” it will create.
If just one parent has a taxable income of over £100,000, they will not be eligible for the entitlement of 30 hours per week of free childcare for children aged nine months to four years from September 2025.
The IFS analysis shows that a parent could lose up to £20,000 of their income due to this scheme. T
his could lead to working parents limiting their earnings to avoid the tax-trap.
Treasury officials believe that the policy should focus on supporting less well-paid working families rather than high-earning ones.
Robert Joyce, deputy director of IFS, said that the “distortions” created are among the most severe seen in a tax and benefit system.
The situation will lead to parents increasing their pension contributions to avoid the tax-trap.
Mr Hunt pledged to increase funding paid to nurseries to provide 30 hours per week of free childcare.
However, the hourly rate rise for three and four-year-olds is minimal, from £5.29 to approximately £5.50.
Neil Leitch, chief executive of the Early Years Alliance, warns that this increase will not help to close the gap between funding and the cost of providing high-quality early years places.
He also said that providers have been forced to increase fees, limit hours, reduce places, and, in some cases, close completely due to the “severe underfunding” for years.
The Chancellor believes that the extension of the 30 hours of free childcare will help parents return to work.
However, with the tax-trap affecting high-earning parents, the distortions created could have the opposite effect.
It remains to be seen if the policy will be re-evaluated to address these concerns.»IFS Warns of Severe Distortions in Hunt’s Free Childcare Scheme«