A new report has recommended that the government increase the HMRC tax-free childcare threshold from £100,000 to either £125,000 or £150,000, or alternatively stagger the removal of free childcare for higher-earning families. The proposal comes as the Labour government faces pressure over the current cliff-edge system, which leaves families with no entitlement to free childcare once one parent earns above the limit.
Report warns of cliff-edge impact
Researchers from the Centre for Tax Reform (CenTax) warned that 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, but if one of them crosses that threshold, they lose the entitlement entirely. The report suggests that restricting free childcare to 15 hours for families above the £100,000 threshold, instead of withdrawing it altogether, would cost £210 million by 2030.
The current system creates a sharp cutoff, meaning a small increase in income can result in a significant loss of support. The CenTax report argues that a more gradual withdrawal of the benefit would be fairer for families and reduce the disincentive to earn more.
Chancellor's budget priorities
Sarah Coles, of pension provider AJ Bell, said the likelihood of John Healey, the Chancellor, using any “wiggle room” in the upcoming autumn Budget for high earners would be “incredibly unexpected”. Ms Coles said: “It’s hard to see that any of these options will be a priority for the Government, let alone make it to the Budget. It would be incredibly unexpected for the Chancellor to use any of his limited wiggle room to ease the pressure on very high earners.”
The report comes in the week Mr Healey said boosting economic growth will be his defining mission as chancellor, as he warned Labour had to “be honest” about the need to control public spending at next month’s budget. In his first big speech since taking the job in July, Healey said the top priority for his 28 October budget would be to support stronger growth across the UK while sticking firmly to the government’s fiscal rules.
Growth as defining mission
“I want to be the chancellor that gets things done and I want to see growth driven from more places across the UK,” he said. The chancellor’s comments underline the tension between supporting families and maintaining fiscal discipline, with any changes to childcare support likely to be weighed against broader spending commitments.
The CenTax report’s proposals are among several options being discussed by policy experts, but with the budget less than a month away, it remains unclear whether any changes to the childcare threshold will be included. The government has not yet responded to the report’s recommendations.
