Universal Credit childcare refund system can leave users worse off and make it difficult to take on more hours
18 February 2025New research has found the Universal Credit (UC) mechanism which offers to cover up to 85% of childcare costs is leaving some parents out of pocket. Low-income families on UC pay for childcare upfront and reclaim costs each month through an online system which means they have to wait long periods for their costs to be reimbursed. The contribution they get is also means-tested against monthly earnings, so the amount they are reimbursed can vary month to month, making it difficult to budget. [case studies are available]. A report released today recommends that parents on UC are more fully compensated for their childcare costs and that the system moves towards more supply-side funding direct to the provider for working parents on UC.
In addition to the problems with the UC claim-back system, researchers found that working parents are facing additional conditionality requirements from DWP to increase their working hours and felt that this threatened to undo work-care arrangements which they had struggled hard to achieve.
A new study by the Institute for Policy Research (IPR) at the University of Bath, funded by abrdn Financial Fairness Trust, highlights how current support systems are failing families. Despite government schemes offering free childcare hours, many UK families, especially those on low incomes, continue to face unaffordable childcare costs.
Based on interviews with low-income parents on UC, the study found that insufficient free hours, added provider fees, and a lack of after-school and limited holiday club options leave many families struggling to balance work and care. Among the report’s recommendations is supporting low-income working parents on Universal Credit by covering 100 per cent of their childcare costs, rather than the current 85 per cent.
One parent in the study explained how she had to pay for a complete six-week term of after school club costs, but would only be reimbursed for the amount of childcare used in each Universal Credit assessment period. This meant that she had to wait two months until she received any reimbursement towards the last two weeks of the payment: “They only pay for the childcare that was already given to my daughter, while where I read the report [invoice], it’s usually like six weeks ahead.”
Shift work could also compound problems for parents who might end up paying for additional hours of childcare beyond those that they actually worked. For example, if the shifts they were offered by employers straddled morning and afternoon nursery sessions, this could result in them paying for double the amount of nursery hours than they were actually working. Although Universal Credit usually allows claimants to reclaim these costs, the reimbursement shortfall and delays can still leave claimants struggling to meet high childcare costs from low wage employment. Researchers recommend childcare is made free for those on Universal Credit. This would enable parents to take on more hours, offer their employers flexibility and remove uncertainty about whether working more hours will actually pay after childcare costs are taken into account.
Researchers recommend the recent extension of conditionality to lone parents and lead carers in couples whose children are aged three - who are now expected to be working or looking for work for 30 hours per week - should also be reversed.
Dr Marsha Wood, a Research Associate at the IPR, said:
“The government has set up a child poverty taskforce to develop a strategy for reducing child poverty, in part through increasing economic activity rates and earnings in families and improving early years learning. The government has also promised to “make work pay” through its New Deal for working people and increases in the National Minimum Wage. Ensuring these goals are met for low-income families will depend on the availability of affordable, quality childcare that can meet the diverse needs of all children. Some of the ways they could do this include fully subsidising preschool childcare for working parents on UC and expanding free childcare support to include clubs not Ofsted-registered, such as sports or drama clubs, providing more flexible, affordable options for low-income working parents.”
Dr Rita Griffiths, a Research Fellow at the IPR, said:
“Current childcare policies are forcing families to make impossible choices between work and care. These reforms are essential to prevent families from being trapped by high childcare costs and bureaucracy while ensuring every child has access to quality early years education.”
This IPR research was funded by abrdn Financial Fairness Trust. It follows on from a wider qualitative longitudinal research study exploring the experience of working claimants on UC published in April 2024.
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In addition to the problems with the UC claim-back system, researchers found that working parents are facing additional conditionality requirements from DWP to increase their working hours and felt that this threatened to undo work-care arrangements which they had struggled hard to achieve.
A new study by the Institute for Policy Research (IPR) at the University of Bath, funded by abrdn Financial Fairness Trust, highlights how current support systems are failing families. Despite government schemes offering free childcare hours, many UK families, especially those on low incomes, continue to face unaffordable childcare costs.
Based on interviews with low-income parents on UC, the study found that insufficient free hours, added provider fees, and a lack of after-school and limited holiday club options leave many families struggling to balance work and care. Among the report’s recommendations is supporting low-income working parents on Universal Credit by covering 100 per cent of their childcare costs, rather than the current 85 per cent.
One parent in the study explained how she had to pay for a complete six-week term of after school club costs, but would only be reimbursed for the amount of childcare used in each Universal Credit assessment period. This meant that she had to wait two months until she received any reimbursement towards the last two weeks of the payment: “They only pay for the childcare that was already given to my daughter, while where I read the report [invoice], it’s usually like six weeks ahead.”
Shift work could also compound problems for parents who might end up paying for additional hours of childcare beyond those that they actually worked. For example, if the shifts they were offered by employers straddled morning and afternoon nursery sessions, this could result in them paying for double the amount of nursery hours than they were actually working. Although Universal Credit usually allows claimants to reclaim these costs, the reimbursement shortfall and delays can still leave claimants struggling to meet high childcare costs from low wage employment. Researchers recommend childcare is made free for those on Universal Credit. This would enable parents to take on more hours, offer their employers flexibility and remove uncertainty about whether working more hours will actually pay after childcare costs are taken into account.
Researchers recommend the recent extension of conditionality to lone parents and lead carers in couples whose children are aged three - who are now expected to be working or looking for work for 30 hours per week - should also be reversed.
Dr Marsha Wood, a Research Associate at the IPR, said:
“The government has set up a child poverty taskforce to develop a strategy for reducing child poverty, in part through increasing economic activity rates and earnings in families and improving early years learning. The government has also promised to “make work pay” through its New Deal for working people and increases in the National Minimum Wage. Ensuring these goals are met for low-income families will depend on the availability of affordable, quality childcare that can meet the diverse needs of all children. Some of the ways they could do this include fully subsidising preschool childcare for working parents on UC and expanding free childcare support to include clubs not Ofsted-registered, such as sports or drama clubs, providing more flexible, affordable options for low-income working parents.”
Dr Rita Griffiths, a Research Fellow at the IPR, said:
“Current childcare policies are forcing families to make impossible choices between work and care. These reforms are essential to prevent families from being trapped by high childcare costs and bureaucracy while ensuring every child has access to quality early years education.”
This IPR research was funded by abrdn Financial Fairness Trust. It follows on from a wider qualitative longitudinal research study exploring the experience of working claimants on UC published in April 2024.
Read full report