Rising costs of childcare: which families are struggling most?

The price of childcare in the UK is high and rising quickly. As many families with pre-school children pay little or nothing for childcare, policies to reduce its costs may make limited difference to those most affected by the cost of living crisis. But wider reforms to the system could deliver longer-term benefits.

The cost of childcare for some types of families in the UK has been on the rise in recent years. Between 2010 and 2021, the sticker price for a part-time (25 hours per week) nursery place for a child under two rose by 59%. This is around twice as quickly as overall inflation.

The rise, alongside the general increase in prices across the economy, has prompted government ministers to consider what can be done to help families facing a cost of living crisis.

In reality, when talking about the cost of childcare, there’s no ‘one-size-fits-all’. Some families face extraordinarily high bills, which eat up a large share of their income.

But in England, the majority of families with pre-school aged children don’t have any childcare costs at all, either because they are not using formal childcare or because they are benefitting from government or employer support.

Teasing out which families are struggling with childcare costs is an essential first step in developing policy options that can help those most affected.

Use of childcare

Families use many different arrangements to look after their young children. We can group these into formal arrangements – such as nurseries, childminders or playgroups – and informal ones, including care from grandparents and other family and friends.

Across the European Union, just over a third of children aged two and under are in some kind of formal care, and another quarter are in informal care only. Just under half of children are looked after exclusively by their parents. But formal childcare use can be much higher – for example, two-thirds of young children in Denmark and the Netherlands are in formal care.

As children get older, their families are more likely to use formal care – in England, data from 2019 suggest that a third of one-year-olds were in formal care, rising to almost 60% of two-year-olds and 85% of three- and four-year-olds. Families also vary quite a bit in how many hours of formal childcare they use.

Childcare costs

These different patterns of use contribute to large differences in costs. Choices about whether to use formal childcare, what type of setting to pick and how many hours to pay for are the principal drivers of families’ weekly childcare bills.

But childcare spending is also affected by factors that are less directly within families’ control. The existence and extent of government involvement in the early years market – through providing settings, regulating prices or subsidising families’ childcare directly – has a huge impact on choices and costs.

Children’s ages are also an important driver: prices for younger children are usually much higher, partly due to tighter staff-to-child ratios in younger age groups.

This is borne out in data from England. Among all families, the median amount spent by households on childcare, irrespective of the child’s age, is £0 per week. In other words, more than half of all families with children under school age paid nothing out-of-pocket towards the cost of childcare in 2019. This is either because the child did not attend a formal provider or because the family used government or work-based support to pay for the care.

Among families using formal childcare, the median weekly spend for a one-year-old was £90, falling to £45 per week for those with a two-year-old. This reduces to less than £5 per week for families with a child aged three or four.

These variations across ages reflect differences in government support as well as in prices and hours. In England, all families with a child aged three to four are eligible for 15 hours of free childcare per week – and families where all parents are in work get 30 hours free each week.

As a result, parents of children in this age group tend to pay less for formal care on average. Around two-thirds of these families did not exceed their childcare entitlements and so didn’t have to pay fees out-of-pocket during term-time.

Families with the highest weekly childcare costs also tend to be those with higher incomes. These families are more likely to have both parents working full-time and therefore use more hours of formal childcare per week.

They also tend to be more willing to pay higher childcare prices. But among families using formal childcare for their one- to two-year-olds, high childcare costs are common even for those on lower and middle incomes.

Figure 1: Mean and median weekly cost of formal childcare in England by age group, 2019

Source: Institute for Fiscal Studies (IFS), 2022
Note: The median family with a child aged one, two, or three to four (left panel) does not pay anything out of pocket for formal childcare.

What can be done to ease childcare costs?

The cost of living crisis has drawn more attention to the high cost of childcare that some families face. In response, the UK government has set out proposals aimed at reducing parents’ costs by reforming the childcare market in England.

These include relaxing staff-to-child ratios for two-year-olds from one staff member per four children to one to five, and a series of changes aimed at supporting more people to become childminders.

Childcare ratios for two-year-olds in England are currently tighter than in most European countries. These legal limits also tend to bind, particularly at younger ages, where around four in five providers are operating at the legal limit.

But comparing ratios internationally can be difficult since countries have different requirements for the training and qualifications of their staff. Even within the UK, Scotland has slightly looser ratios for two-year-olds – one to five, as the UK government is now proposing – but also a somewhat different qualification framework.

Whether any change would affect parents’ costs depends on whether settings will relax their limits, whether they will be able to do this without significantly increasing wages (at a time when recruitment is difficult) and whether any cost savings would feed through into lower prices for parents.

A survey of childcare providers, carried out by the Early Years Alliance, found that 87% of providers reported that they were ‘opposed to the principle of relaxing ratios’ and just 2% believed the changes would result in lower fees for parents.

Another option for the UK government to ease the impact of childcare costs is to increase knowledge and take-up of support that is already available. Awareness and take-up of the universal part-time entitlement for three- to four-year-olds is very high already. But around 60% of families entitled to a 30-hour place, and 65% of entitled two-year-olds, take up less than their full offer.

Programmes outside the free entitlement fare even worse. In 2019, only 40% of pre-school parents reported being aware of the tax-free childcare programme that provides a 20% childcare subsidy and is the main source of support for working families with children aged between one and two.

Working families on low incomes can get generous childcare subsidies through the benefits system, but recent statistics suggest that only a quarter of eligible families with pre-school aged children received anything at all through this programme.

Figure 2: Awareness of the main programmes of government support for childcare in England, 2019

Source: IFS, 2022
Note: For two-year-old entitlement, the figure shows the share of parents of two-year-olds aware of the programme (rather than the share of all parents of a zero- to four-year-old). Identification of eligible families is detailed in the original report.

Are childcare costs an issue?

A child’s first few years of life can be an expensive time for families, particularly in countries where there is relatively little public funding for childcare. Prices in England are high by international standards, although government support reduces them for some families – especially those with three- and four-year-olds.

But those with younger children often face a double hit from higher prices and less access to government support. This is probably part of the reason that they are less likely to use (much) formal childcare.

As a short-term solution to the cost of living crisis, increased public funding for childcare may not be the answer. Most people do not have pre-school aged children and most families that do have young children pay nothing for childcare.

But in the longer term, high childcare costs can shape families’ decisions and make it more difficult for parents (mainly mothers) to return to work. International evidence from countries including Canada, Germany and Spain suggests that providing more affordable childcare can significantly boost mothers’ labour supply. This is especially the case in places where few mothers work or where childcare availability is low.

On the other hand, childcare policies do not always affect labour supply. For example, an expansion of subsidised childcare in Norway had little impact on work decisions.

In the UK, the best available evidence suggests that full-time care for four- and five-year-olds modestly boosts mothers’ labour supply, but the part-time universal free entitlement had no effect. There is little evidence for the impact of childcare subsidies on mothers with younger children.

And there are reasons to support childcare that stretch beyond families’ costs and their work decisions. High-quality early years provision can support children’s development and close early inequalities – although the short, structured days in this sort of provision can be less helpful for parents seeking to work.

The childcare system supports children and their parents through a critical period, with consequences for child development and parents’ working patterns as well as family budgets.

While the childcare system is unlikely to be the source of significant short-term wins to address wider cost of living pressures, longer-term policies that recognise these multiple aims can help the sector to deliver better outcomes for all families.