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The childcare challenge: What parents need to know for their future finances

Paloma Kubiak
Written By:
Paloma Kubiak

The cost of childcare is a major challenge for UK families at the best of times, let alone during a cost-of-living crisis which is why you need to take advantage of government schemes to help.

The fact that the cost-of-living crisis for many families, continues to exacerbate already unaffordable nursery and childminder fees is concerning as cost pressures are already so acute.

According to children’s charity Coram, childcare costs are continuing to rise – this year up by 5.6% to £148 per week for those aged under two, just for a part time place.

It’s a conversation that will crop up in many households with young children – whether to return to the workplace, or, take on full-time childcare responsibilities to help manage costs.

And it can be really hard to balance spending time away from your child or children to earn money and progress your career, only to have to spend the majority of that income paying someone for childcare, be that nursery or childminder costs.

What’s key is that parents – while navigating these conversations and challenges – make use of the support that is available to them.

Tax-free childcare

Tax-Free Childcare is a government scheme to help working parents with the cost of childcare. It can be used at the same time as accessing free hours of childcare. Under the scheme, the government tops up every £8 you pay for your childcare by an extra £2 (up to a maximum of £2,000 per child per year) – equivalent to receiving up to £500 every three months for each child.

If your child is disabled, this figure goes up to £1,000 every three months, up to £4,000 a year. Children qualify until they are 11 years old, or 16 years old for those with a disability.

But the latest figures from HMRC show just a fraction of eligible parents are claiming for help towards costs for nursery fees, childminders or even summer holidays camps. Just 477,000 families used it in March this year – and 650,000 in the 2022/2023 tax year.

It is incredibly important that efforts are made to ensure families are aware of what help is out there and, importantly, how this can help their financial futures.

The ‘motherhood penalty’

More often than not, mothers may feel little choice but to give up their careers or opt for a more flexible work arrangement in order to look after their young family, which, in combination with childcare costs, can mean there is very little left to build savings or set money aside.

Fidelity International’s most recent Women & Money research found for seven in 10 (71%) women with children under the age of 18, childcare costs are a barrier to investing their money either in the first place or investing their money at all. And this is just one of many barriers.

Women face a myriad of financial planning challenges from the so-called ‘motherhood penalty’, to the ‘good daughter penalty’ which all help to widen the gender pay gap. While these factors are challenging, and made even more difficult by rising costs of living, often they’re beyond our control.

What we, as parents, can control, however, is how and when we access and take advantage of tax-free childcare to help with childcare costs and alleviate some of that cost burden. It can make a real difference when balancing work commitments, other care responsibilities, household outgoings and starting to think about being able to put money aside, be that for emergency savings or investing for the future.

Immediate vs longer-term financial impact

The gap in men’s and women’s salaries often starts during the child-raising years and then tends to be compounded by additional time taken off for maternity leave, or if work hours are adjusted to work in a part-time capacity. While the drop in earnings is immediately obvious; the longer-term impact often goes unnoticed until much later in a woman’s life.

Earlier this year the DWP published a look at the gender pension gap and revealed that the gap between men’s and women’s pension savings stands at over 30%. As we all navigate the various financial challenges in life, including caring for children or other loved ones, it’s critical we safeguard our own financial futures too. And if you have young children, financial planning is incredibly important.

From making the most of the schemes that are available and fully utilising them, to helping put a budget in place that can flex as needed, but helps show where there might be small savings that can be put towards the future. While these steps can feel small, the power of regular savings can’t be underestimated.

Financial planning can help, from making the most of the schemes that are available, through to being able to budget and make small and regular savings towards the future.

Emma-Lou Montgomery is associate director, personal investing at Fidelity International