High childcare costs needn’t give you a case of baby blues

Annabel Denham
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RISING childcare costs are deterring British mothers from returning to work. According to a 2011 Eurostat survey, 48.8 per cent of women with three or more children are in employment in the UK, compared with 71.3 per cent in the Netherlands and 68.2 in Finland. But family formation patterns have changed over the past few decades, and both parents often want to continue with their careers after having a child.

A family with both parents working full-time, and two children aged two and above in full-time care (42.5 hours per week, 47 weeks per year), will spend an average of £13,529 per year on childcare. Middle income earners tend to be hit hardest by childcare costs, as they are not entitled to the working tax credit. A family with a gross household income of £76,374 will see that income reduced to £43,604 after childcare and taxes, says Alex Hurrell at the Resolution Foundation. And this is not to mention additional costs that come with having a family – mortgages, food, utilities, saving for school fees (see article below) and the odd family holiday.

According to the Tax Nanny Payroll, the average weekly salary in Greater London of a live-out nanny is £340-£500; for a live-in nanny the rate will be £310-£450. So where possible, opt for the more cost-effective live-in nanny.

Nanny wages are usually agreed on the basis of net pay. However, it is cheaper for employers to negotiate wages in gross terms; if you agree to a net salary, you will be agreeing to pay all your nanny’s taxes. The payroll service NannyTax warns that if, for example, you agree a net salary of £300 per week, the nanny’s gross salary would be approximately £381. In addition to the nanny’s tax and national insurance (NI), you will also have to pay employer’s NI contributions – which in this instance would be approximately £35, bringing the total cost to £416.

Private nannying is an expensive route to go down. Indeed, NannyTax found that “live-out nannies working in Central London earned an average of £34,516 in 2011”. This means that the second earner would need to earn the best part of £50,000 if a couple was paying a nanny full-time. If the second earner opts to return to work six months after the child’s birth, the couple will be paying those nannying fees for a good few years.

That is why the best advice is to save, save, save – and as soon as possible. If your plan is to start a family within the next few years, one option is investing in a higher rate savings account. A fixed-income Individual Savings Account (Isa), for example, will let you plan and give you predictable returns.

Unfortunately, there are currently few mechanisms in place that make childcare more affordable. But before you despair, there are some ways to cut costs.

According to Childcare Vouchers, if your employer signs up to a scheme, you will be given the option to take part of your salary in childcare vouchers. It is arranged through payroll, and the value of vouchers you choose to take is tax and NI free – meaning you end up with more than if you had paid for your childcare in cash from your normal taxable pay. The process – called “salary sacrifice” – can save higher rate taxpayers up to £623 per year. Each parent can claim, which doubles the amount to £110 a week and maximum tax relief to £2,390. Be aware that, if your employer pays more than the maximum £55 per week or £243 per month in vouchers, you will need to pay tax and NI contributions on the difference.

At a cost of £2.5bn to the Department of Education, “parents of all three and four-year olds get state help towards childcare costs regardless of income” says Hurrell. It is largely delivered through nurseries and preschools. In England, the free entitlement is offered for 15 hours per week. This is worth in the region of £2,000 per year for each child.

Getting an au pair can be a highly cost-effective alternative to a nanny. According to the parenting advice website Baby Centre, if your au pair works 25 hours per week, you will need to pay them a minimum of £65 per week. For 30 hours a week, this “should be at least £80 and if they do extra babysitting outside of their set hours, you’ll need to give them extra pocket money”. However, it is important to take into account that they won’t possess the same qualifications as a nanny. They will also be living and eating in your home, using your water and electricity.

Parents in the UK have the highest dependency on relatives and friends for help with childcare. So if you are lucky enough to have willing family and friends, this could be an excellent way to keep costs down.