UK chancellor urged to fix childcare 'cliff edge' that prompts parents to cut work

Key facts

• UK Chancellor John Healey has been urged to address a £100,000 childcare "cliff edge" policy.
• Families earning less than £100,000 annually are entitled to 30 hours of free childcare per week.
• One parent crossing the £100,000 income threshold results in the loss of this entitlement.
• CenTax estimates that by 2030, nearly 12,000 families may artificially suppress earnings to stay below the threshold.
• The report indicates a jump in non-working mothers when a partner's income exceeds £100,000.
• CenTax proposed restricting free childcare to 15 hours for families above the threshold, costing £210m by 2030.

UK Chancellor John Healey is facing pressure to reform a childcare policy that creates a financial "cliff edge" for higher-earning parents. The current system, expanded in 2024, offers 30 hours of taxpayer-funded childcare per week to families where both parents earn under £100,000 annually. However, if one parent's income crosses this threshold, the family loses the entitlement entirely.

Researchers from the Centre for Tax Reform (CenTax), based at Warwick University, warned in a report that this policy is distorting the labor market. Their analysis suggests that by 2030, parents facing this cliff edge will need to earn an average of £124,000 to be financially no worse off after losing their free childcare. The report highlights that income "bunching" just below the £100,000 mark was already evident in 2022, with an estimated 1,000 families artificially suppressing earnings. This figure could rise to nearly 12,000 by the end of the current parliamentary term.

Furthermore, the report suggests the policy may be discouraging mothers from working. It found that 6% of lower-paid partners, typically mothers, are out of work below the £100,000 threshold, a figure that jumps to 9% above it. This suggests a potential long-term impact on mothers' earnings and career progression.

CenTax criticized the policy's reliance on expected annual earnings, noting that some families claim the entitlement despite ultimately earning more. The think tank proposed several solutions: restricting free childcare to 15 hours for families above the £100,000 threshold, which would cost an estimated £210 million by 2030, or implementing a gradual taper of the entitlement at a rate of 28 pence for every pound earned above the threshold, which would be revenue-neutral. Healey is set to deliver his first budget on October 28.