Blog by Modulus

In August 2021 I joined the young parents club.

This new group offers members wake-up calls at 1.43am every day, anxious waits in half-broken plastic chairs at your local A&E and your best clothes decorated in a blend of vomit and excrement.

But for all the huge challenges, I have found parenthood hugely rewarding. Our daughter, Evelyn, is forever smiling and has already brought so much joy to her two weary-eyed parents.

I have learned many lessons this past year, but one of the biggest is that parenthood is immensely expensive.

There are the nappies, the clothes, the shoes, the first buggy, the second lighter buggy, the swimming lessons, more nappies, the first car seat, the second car seat, the toys… the list never ends.

This will not be news to the other members of the parent club. But in my short experience I can tell you that the costs of parenthood are rising at an alarming rate and, as inflation increases, the government’s support for young families is reducing every day. This is the cohort, sorry, one of the cohorts, that this government has forgotten about.

The humongous costs also mean childcare has become an issue that financial planners need to address with younger clients.

The nursery run

Of all the outgoings parents of young children face, nursery fees are by far the biggest. Our nursery in southeast London does an amazing job of looking after Evie, but its costs are rising each day.

Last month it sent us an email saying that after chancellor Jeremy Hunt’s Autumn Statement failed to provide any further support for nurseries, it was ‘left with no option’ but to increase its fees next March.

With energy bills rising for businesses, this is hardly a surprise. But the new fees, which are up about 10%, make for interesting viewing.

These costs are on the high side and reflect the London premium. But there are other more expensive nurseries (as well as some cheaper ones).

According to the government’s money guidance service, Money Helper, the average monthly cost of nurseries across the UK is £1,143. I suspect this figure has not been updated to factor in the 10%+ inflation we have seen this past year.

The Early Years Alliance surveyed 1,265 of its childcare provider members in October and found that seven in 10 nurseries will increase fees next year and one in 10 nurseries will close if the government does not provide additional financial support to cover energy bills in 2023.

The government does provide parents with some support for nursery fees. Once your child reaches their third school year of nursery, you get 30 hours of free childcare a week – not including school holidays.

And as long as one parent doesn’t earn more than £100,000, you can get £166.67 each month for each of your children from the tax-free childcare scheme. This scheme, introduced by former chancellor George Osborne in 2014, does help, but with monthly bills now reaching £2,166, this equates to less than 8% of the total cost of a full-time nursery space, reducing the fees to £2,000 per month.

Let’s put that figure into perspective. £2,000 is more than many private school fees – King’s College School in Wimbledon, for example, charges £1,697.50 a month for first forms (when spread over 12 months).

This price means both parents will have to earn at least £33,000 each just to cover nursery fees. If one parent earns less than that, the family will be in the red each month from nursery fees alone.

This means many teachers, nurses and other key workers will be forced out of the workforce because the cost of a nursery is more than their monthly salary.

Dale Kirkpatrick, director and financial planner at Modulus Financial Planning, said he was talking to an increasing number of clients about childcare fees.

As the government’s tax-free childcare scheme is removed if one parent earns above £100,000, Kirkpatrick says he has been advising some of his clients to increase their pension contributions or give some of their pay packet to charity to stay below this threshold.

Kirkpatrick, a father of three young children, was shocked by how expensive childcare fees are.

‘For us, [nursery fees] are basically double our mortgage, and they are going to be more than that next year when my wife goes back to work. It is our biggest expense, but we don’t have any family nearby.’

What other support do parents get?

Aside from tax-free childcare, the only other support available for middle-income parents is child benefit. This gives you £21.80 per week for your first child, but there is an earnings limit.

You only get child benefit if you or your partner earn less than £50,000. If you earn between £50,000 and £60,000 there is a tax taper – the high-income child benefit tax charge – so you lose 1% of the benefit for every £100 you earn above £50,000. At a £60,000 salary, you get zero child benefit.

This tax charge, also introduced by Osborne, has had its thresholds frozen since 2013, meaning millions of households have lost government support or been forced to pay back tax on the support they do get as earnings rise (at a slower pace than inflation).

A freedom of information request by Quilter found 630,000 people paid the high-income child benefit charge this year.

Ian Browne, a pensions expert at Quilter, said it was ‘perverse’ that the government has not raised the thresholds and by freezing them the government is hitting ‘middle- and low-income households’.

Indeed, if you are in a situation where your partner has not returned to work because the nursery costs exceed their salary and you earn £60,000, then you get zero support from the government.

A salary of £60,000 is comfortably above the national full-time average of £38,131, according to the Office for National Statistics, so it would be tempting to ask whether those on such incomes really need the support.

But in the context of rising inflation, every penny helps. Once you consider higher housing, food and energy costs, every penny of support lost adds to the problems for the squeezed middle.

This experience of childcare costs is being left by many young planners today.

Tom Morris, a director and financial planner at Ovation Finance, is a father juggling the costs of two children and is helping some of his clients deal with the same financial struggles.

‘We have a few young professionals in that squeezed middle – late 20s and early 30s,’ he said.

‘It’s at pre-school where the costs really come in, and it is something [parents] often stumble into. For a lot of people, this period is a hand-to-mouth existence.

‘A good way to think about this period is as an investment in your career because that makes it more palatable. Having children comes with a cost and if you want to continue your career, your take-home pay and disposable income are not going to be what they were – so think of it as an investment in your career.’

Morris said he had no idea why the government’s 30-hour free childcare support comes in when your child is three and not before.

How does the UK compare with other countries?

Looking at the international picture, the UK does not fare well when it comes to childcare costs.

Among the OECD nations, the UK ranks joint third-most expensive, behind Switzerland and New Zealand, with childcare costs accounting for 22% of a couple’s net income.

Source: OECD

Like with so many of our public services, people often look to the Nordic nations for examples of good practice, and their governments spend a lot more on childcare than the UK government does.

According to OECD data, the UK spends 0.1% of its GDP on childcare costs, compared with Norway’s 0.6% and Sweden’s 1.1%.

Evidence that the government is not spending enough can be found in the number of nurseries that are having to close because of rising costs, lack of funding and difficulty retaining staff, many of whom can find better-paid and less-exhausting jobs elsewhere.

According to Ofsted figures, the number of registered childcare providers fell by 5,400 (8%) over the 12 months to 31 August, Nursery World reported. With thousands of nurseries closing their doors, it shows how the government is not supporting nursery businesses and their workers, as well as parents.

Matt Arnerich, director of brand and communications at childcare tech platform Famly, said the situation is not functioning for parents or nursery workers, who themselves are not being paid enough.

‘Childcare in the UK is too expensive for parents, it bankrupts providers and puts staff below the poverty line,’ Arnerich said.

‘We need to rethink who foots the bill in the UK for such an important public good. If the government really cared about getting parents back to work and giving children a better start in life, they would divert more funds to the sector. Instead, parents must choose between work or staying home, and staff subsidise vital early support with their tiny pay packets.’

The squeezed middle

I must count myself as one of the luckier ones: I earn a good salary, as does my wife, who works in the NHS.

However, my experience of being a parent has opened my eyes to how financially difficult this period is for so many young parents in the middle-income category. Things are even tougher for those on lower incomes, who face a dire situation. As for single parents, I have no idea how they cope.

The government seems oblivious. The word ‘parents’ did not feature once in Hunt’s Autumn Statement in November.

Credit cards and debt is the only way millions of young parents will be able to survive the next few years. The young parent club is one the government has ignored.