The Chancellor has announced an expansion of free childcare for children aged between nine months and two years old, coming into full force in 2025.
Given that the UK is the most expensive country in the developed world to raise a young family, this announcement comes as welcome news for many households.
Yet a lot could happen between now and 2025. Perhaps the policy will be watered down due to political opposition or economic challenges. There is also a general election due before 28 January 2025. A new political landscape could also change the plans.
How can new parents and prospective parents integrate their hopes for a family into their financial plan? Below, we offer some insights and ideas for the 2023-24 tax year to discuss with your financial adviser.
Benefits to consider
There are some (fairly limited) state benefits currently available to parents in 2023.
Tax-free childcare allowance
An important one is tax-free childcare, which gives you up to £500 every 3 months (£2,000 per year) to help cover the cost of a child under 11 years old.
Adopted children are eligible but foster children are not. A disabled child may entitle you to more benefits - up to £4,000 per year - until their 16th birthday.
Once your child turns three, moreover, you can usually claim up to 16 hours per week of free childcare (570 free hours per year) until he/she turns five. Some parents may be entitled to 30 hours per week, although this depends on factors such as your income.
New mothers can receive Statutory Maternity Pay (SMP) for up to 39 weeks after your child’s birth. For the first six weeks, you get 90% of your gross weekly earnings. For the 33 weeks after that, you get £172.48 or 90% of your average weekly earnings (whichever is lower).
New fathers are entitled to one week or two consecutive weeks of paternity leave. Within this time, you can be paid £172.48 a week or 90% of your average weekly earnings (whichever is lower).
Alternatively, parents can opt for Shared Parental Leave and Pay (ShPP) which is paid at £172.48 a week or 90% of your average weekly earnings (whichever is lower).
The shifting childcare landscape
The above benefits raise a lot of questions. Should we opt for Paternity/Maternity Leave or should we split the childcare in year one by going for ShPP?
After these leave-related benefits run out, what do we do until our child turns three (when they become entitled to 15/30 hours of free childcare)?
For many families, difficult decisions need to be made to make ends meet. Often, women will stay at home to raise young children since their male partner/husband is more likely to earn more than them.
The UK government appears to be recognising the importance of getting young parents (especially women) back into work to help raise national productivity. The chancellor thinks this can be achieved by gradually expanding free childcare to those with younger children.
From April 2024, parents with two-year-olds may be entitled to 15 hours of free weekly childcare. This will extend to children over nine months old from September 2024.
By September 2025, the plan is to have the “full package” in place - 30 hours of free childcare for every child aged between nine months and five years.
Counting the cost of childcare
Before starting a family, it is a good idea to go forward with your eyes open about the costs and state benefits involved, hard though this may seem.
The UK is currently a very expensive place to raise a young child. Sending an under-two-year-old to nursery for 25 hours per week (part-time), for instance, can cost £7,729 per year. A full-time week could cost over £14,030 a year.
Indeed, for some parents in England, childcare costs can eat up 65% of their wages. This is a big reason why many young parents rely on relatives, like grandparents, to help.
Many factors are driving the rising cost of childcare. High demand from parents is one reason. Child-to-staff ratios and high staff turnover also play a role due to the demanding, low-paid work involved with being an early years educator, playgroup assistant or childcare worker.
Childcare and your financial plan
When considering childcare in your wider financial plan, the key question to ask is: “What do I want to do?”
Financial planning is, ultimately, about helping you achieve your goals. So, if you want to be at home with your child for a season (even if this is not the most “financially efficient” decision), then this is perfectly legitimate.
If you want to start a family, then the Chancellor’s plans for expanded free childcare may play a role in your decisions (e.g., about timing). However, be careful not to base important life decisions entirely on what might happen with government policy.
Having children does have an impact on your finances. You (and your partner) may need to take a short career break. You may need to pay for professional childcare for a time. These can erode your earnings and, if not careful, your ability to save and invest,
A financial planner can help you explore different ways to maximise your financial position whilst starting a family. For instance, could both you and your partner go down to a 4-day week after you have finished your leave? How might this compare, financially, to one person working full-time whilst the other stays at home with the kids?
Be careful not to neglect your tax plan, financial protection plan and retirement plan when crafting your financial plan in light of childcare.