‘Traditional breadwinner’ and dual earner families – whose worst off in the ‘cost of living crisis?’

‘It’s the Economy stupid!’

Unsurprisingly, the state of the UK economy seems to be a topic consistently on the lips of politicians, commentators, journalists and families alike. Indeed, it now seems pretty certain that a  key battleground of the upcoming 2015 general election will be the economy, with voters up until very recently seeing no issue as more important . Add this to a emerging cross party consensus that is insistent on increased parental labour market participation, and it’s not hard to see why issues regarding the financial position of families are ripe for discussion. A key question to answer then is, ‘Are particular family types financially penalised once tax, benefits and childcare costs have been taken into account?’

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Let’s start by considering two unrelated fiscal facts. First, families that follow a ‘traditional breadwinner’ family structure, whereby one parent is in full time paid employment and the other is at home taking on unpaid caring responsibilities pay substantially more tax and national insurance contributions than equivalent dual earner households. Observe a case in point; in 2013, a one-earner family with two children on a pre-tax income of £26,648 per year (similar to the 2013 full time median income), or £511 per week paid £109.43 per week in income tax and national insurance, whilst the equivalent dual earner couple paid only £55.34, almost half the amount.

Second, for those who take it up, formal childcare costs in the UK take up a huge amount of a family budget. Research by the Family and Childcare Trust shows that annually, the average family now pays out more in this area than the average monthly mortgage. Thus, for the dual earner family paying for childcare, childcare costs potentially take a huge lump out of the family income, and can hardly be ignored.

Thus, on the basis of both these ‘fiscal facts’ both one and dual earner families could be said to be having it pretty tough. However, who is actually worse off once tax, national insurance, state transfers and childcare costs are taken into account?

My analysis found that families on ‘squeezed middle’ incomes (75 per cent, 100 per cent and 125 per cent) are better off as dual-earners than they are as traditional breadwinner couples, even when childcare costs of £176.60 per week are taken into consideration. The disparity is greatest at 100 per cent average wage where a one-earner couple is nearly £1000 worse off per year than the dual earner equivalent. Those at 75 per cent average wage are around £700 per year worse off whilst those at 125 per cent average wage are worse off by £600 annually.

However, the picture is rather different for families on other incomes. At 50 per cent, one-earner couples are more than £1200 per year better off, at 150 per cent average wage they are more than £2000 better off per year and at 200 percent the difference is nearly £5000. The reasons for this vary depending on the wage level in question. At 50 per cent, the difference is down to the generous level of tax credit support and relatively low levels of Income Tax and National Insurance paid by breadwinner families and the at lower income points. At 150 per cent and 200 per cent of median income, although the difference in Income Tax and National Insurance paid is relatively large, the difference in tax credit entitlement is relatively small due to the higher income levels. At 200 per cent income for instance, neither family is entitled to any tax credit payment. This lack of cash transfer (which at lower income points compensates for childcare costs) ensures that one-earner couple families are significantly better off to the tune of £2112.69 and £4886.31 per year.

In summary, it really does depend on how much one earns as to how well off one and dual earner couple families are in comparison to one another. It should be noted that whilst this analysis takes account of a number of important financial costs, not all have been included.  In terms of policy implications, it is yet to be seen how the upcoming childcare policies will alter the results seen here. That is, those entitled to the Universal Credit will be able to get 85 per cent of their childcare costs covered, up from 70 per cent presently whilst those not eligible will be eligible for a childcare tax break of 20 per cent up to £6,000 per child (see here and here).

Theoretically, covering more of the childcare costs faced by dual earners, or offering childcare tax breaks should improve the position of dual earner couples. As such, the Government should consider introducing policies that are not just aimed at increasing formal childcare choices but which reflect both the results shown here for middle income families and the diversity of choices regarding how families choose to provide childcare at different stages of both their and their children’s lives.

A fully referenced report can be read here

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