Childcare programmes in PolicyEngine UK

This report provides an analysis of childcare programmes in the UK, examining how they are modelled in PolicyEngine UK and their distributional impacts across different household types and income groups. We link each programme component to its implementation in the codebase to make this report a technical reference for understanding how childcare calculations are performed within the PolicyEngine UK microsimulation model. The report covers five major childcare programmes:

• Tax-Free Childcare: The UK government adds £2 for every £8 parents pay into a childcare account, up to £2,000 per child per year (£4,000 if the child is disabled).
• Extended childcare entitlement: The UK government funds 15 to 30 hours of free childcare per week for working parents in England, depending on the child’s age.
• Universal childcare entitlement: The UK government provides 15 free hours of childcare per week for all 3- and 4-year-olds in England.
• Targeted childcare entitlement: The UK government offers 15 free hours per week for 2-year-olds in households receiving certain benefits.
• Care to Learn: The UK government covers weekly childcare costs for parents under 20 in England who are in education or training.

For each programme, we provide details on eligibility criteria, implementation, and calculation methods. For a complete assessment of eligibility criteria, please refer to the official government sources linked for each programme throughout this report. Finally, we explain our calibration methodology to ensure the model accurately reflects real-world participation and expenditure patterns.

Table 1 compares PolicyEngine’s estimates of the budgetary impact of the main childcare programmes with government-reported figures which are reported by fiscal year.

Table 1. Budgetary estimates for childcare programmes (PolicyEngine vs government)

Programme	PolicyEngine estimate 2025 (£bn)	PolicyEngine estimate 2024 (£bn)	Government report 2024 (£bn)	Relative error in estimate 2024 (%)
Tax-Free Childcare	0.7	0.6	0.6	-0.7
Extended childcare	4.4	2.6	2.5	3.8
Universal childcare	1.8	1.6	1.7	-5.9
Targeted childcare	0.5	0.5	0.6	-10.0

Table 2 compares PolicyEngine’s estimates of programme caseloads for the main childcare programmes with those reported by the government.

Table 2. Caseload estimates for childcare programmes

Programme	PolicyEngine estimate 2025 (thousands)	PolicyEngine estimate 2024 (thousands)	Government report 2024 (thousands)	Relative error in estimate 2024 (%)
Tax-Free Childcare	740	715	660	8.3
Extended childcare	970	710	740	-4.1
Universal childcare	520	460	490	-6.1
Targeted childcare	100	115	130	-11.5

The UK government, through HM Revenue and Customs (HMRC), runs the Tax-Free Childcare scheme that provides funding for working families with childcare expenses. For every £8 paid into a childcare account, the government adds £2. HMRC contributes up to £2,000 per year for each eligible child. For disabled children, this allocation increases to £4,000 per year.

The government provides standard childcare funding until 1 September after the child's 11th birthday. For disabled children who receive disability benefits or are certified as blind/severely sight-impaired, funding continues until 1 September following their 16th birthday. We determine eligibility by checking each child’s age and disability status.

The UK limits the programme to households where each partner earns—between employment and self-employment income—at least these amounts over a 3-month period, depending on their age, as shown in Table 3.

Table 3. Minimum earnings thresholds by age group for TFC programme

Age group	Minimum earnings
21+	£2,379
18-20	£1,788
Under 18/Apprentices	£1,331

In addition to the earnings requirement, the maximum adjusted net income allowed is £100,000 per year for each partner. We evaluate if the parents meet the income criteria, examining both minimum and maximum thresholds.

Eligible individuals must be either employed, self-employed, or on qualifying leave (sick, annual, or shared parental leave). Non-working partners may still qualify if they receive any of these benefits: incapacity benefit, severe disablement allowance, carer's allowance, or contribution-based employment and support allowance.

Households can use Tax-Free Childcare alongside the extended and universal childcare entitlements, but they cannot combine it with Working Tax Credit, Child Tax Credit, Universal Credit, or childcare vouchers. We check whether the household receives any of these benefits to determine eligibility for Tax-Free Childcare.

Finally, for eligible households, we calculate the government contribution.

To show the impact of TFC on household finances, we start with an example of a single-earner household with one child aged 3. These households become eligible for TFC when the earner is aged 21 or over and earning at least £9,516 annually. The benefit continues until £100,000, where eligibility ends, creating a decline in take-home pay. This creates a divergence between those receiving and not receiving TFC at higher income levels, as shown in Figure 1.

Figure 1. Household net income with and without Tax-Free Childcare

This decline at £100,000 creates an earnings dead zone, which is the width of the area in the chart where the sudden loss of TFC benefits affects household finances. At this threshold, families experience a cliff effect as they transition from receiving childcare support to losing it entirely.

PolicyEngine projects that the UK government will spend £0.7 billion on Tax-Free Childcare in 2025. Figure 2 shows the distributional impact of this programme:

Figure 3 shows our estimation of the number of children in each household income decile receiving Tax-Free Childcare in 2025.

The UK government, through the Department for Education (DfE), runs the extended childcare programme, offering different weekly hours based on the child’s age. Children aged 9 months to 2 years receive 15 hours of free childcare per week, while those aged 3 to 4 receive 30 hours per week.

The UK government requires single parents to be working to qualify for extended childcare. For couples, both partners must be in employment, unless one partner receives a qualifying disability benefit—such as incapacity benefit, severe disablement allowance, carer’s allowance, limited capability for work benefit, or contribution-based employment and support allowance.

The UK restricts eligibility to households where each partner earns, through employment or self-employment, at least a minimum amount over a 3-month period, depending on their age, as shown in Table 4.

Table 4. Minimum earnings thresholds by age group for extended childcare entitlement

Age group	Minimum earnings
21+	£2,379
18-20	£1,788
Under 18/Apprentices	£1,331

These thresholds are based on working 16 hours per week at the applicable national minimum wage. Adjusted net income must also not exceed £100,000 per year.

We determine the weekly hours based on the child's age and apply the funding rates to calculate the total annual entitlement value. Table 5 shows examples of entitlement calculation based on age and funding rates.

Table 5. Examples of annual childcare entitlement by child age

Child age	Weekly hours	Funding rate (2025)	Annual entitlement (2025)
2	15	£8.3	£4,719.6
3	30	£5.9	£6,703.2

To show the impact of extended childcare entitlement on household finances, we start with an example of a single-earner household with one child aged 3. These households become eligible for extended childcare when earning at least £9,516 annually for those aged 21 or over. The benefit continues until £100,000, where eligibility ends, creating a decline in take-home pay. This creates a divergence between those receiving and not receiving extended childcare at higher income levels, as shown in Figure 5.

Figure 5. Household net income with and without extended childcare

PolicyEngine projects that the UK government will spend £4.4 billion on extended childcare entitlement in 2025. Figure 6 shows the distributional impact of this programme:

Figure 7 shows our estimation of the number of children in each household income decile receiving extended childcare entitlement in 2025.

The UK government, through the Department for Education (DfE), provides free childcare for all 3- to 4-year-olds in England under the universal childcare programme. Each eligible child receives up to 570 hours per year, delivered as 15 hours per week over 38 weeks through an approved childcare provider. This programme applies to England only.

The UK government grants universal childcare entitlement to children who meet residence and age conditions. The child must live in England, be at least 3 years old, and not yet reach compulsory school age.

We determine the weekly hours based on the child's age and apply the funding rates to calculate the total annual entitlement value.

To show how the universal childcare entitlement affects household finances, we examine a single-earner household with one child aged 3. The household cannot claim both universal childcare and Tax-Free Childcare at the same time. Figure 9 shows how net income changes with the head of household’s earnings under each option.

Figure 9. Household net income with and without universal childcare

PolicyEngine projects that the UK government will spend £1.8 billion on universal childcare entitlement in 2025. Figure 10 shows the distributional impact of this programme:

Figure 11 shows our estimation of the number of children in each household income decile receiving universal childcare entitlement in 2025.

The UK government, through the Department for Education (DfE), provides the targeted childcare entitlement, offering 15 hours of free childcare per week for eligible 2-year-old children in England. This entitlement totals up to 570 hours per year, delivered across 38 weeks.

The UK government grants targeted childcare entitlement to households that receive one or more qualifying benefits. These include Income Support, income-based Jobseeker’s Allowance (JSA), income-related Employment and Support Allowance (ESA), and the guaranteed element of Pension Credit. Households may also qualify if they receive Universal Credit and have earned income below £15,400 a year after tax (excluding benefit payments), or if they receive Child Tax Credit (but not Working Tax Credit) with gross annual income below £16,190.

The UK government provides up to 570 hours of free childcare per year for eligible children, delivered as 15 hours per week over 38 weeks. Table 6 shows how the annual entitlement varies based on eligibility, age, and funding rates.

Table 6. Examples of annual childcare entitlement by age and eligibility

Child age	Eligible	Hours entitlement	Hourly rate (2025)	Annual entitlement (2025)
1	No	0	£11.2	£0
2	Yes	570	£8.3	£4,719.6
3	No	0	£5.9	£0

To show the impact of targeted childcare entitlement on household finances, we start with an example of a single-earner household with one child aged 2. Figure 13 shows household net income based on head employment income.

Figure 13. Household net income with and without targeted childcare

PolicyEngine projects that the UK government will spend £0.5 billion on targeted childcare entitlement in 2025. Figure 14 shows the distributional impact of this programme:

Figure 15 shows our estimation of the number of children in each household income decile receiving targeted childcare entitlement in 2025.

The UK government, through the Department for Education (DfE), runs the Care to Learn scheme in England to support young parents under the age of 20 who continue their education while caring for children. The programme covers childcare costs during education or training, offering up to £180 per week outside London and up to £195 per week in London.

The UK government provides Care to Learn support to young parents who meet specific eligibility criteria. To qualify, applicants must be under 20 years old, not enrolled in higher education or an apprenticeship, and living in England.

We determine whether the applicant lives in London and applies the weekly rate based on their location. Table 7 shows the annual entitlement in 2025 by location.

Table 7. Annual childcare entitlement (Care to Learn) by location

Location	Weekly rate	Annual entitlement (52 weeks)
London	£195	£10,140
Outside London	£180	£9,360

Due to the absence of relevant cases in the Family Resources Survey, we are unable to estimate the economic impact of this programme. Nevertheless, the programme is implemented and can be used to calculate benefits in the household section of PolicyEngine.

To align our model with real-world participation and expenditure patterns, we calibrate our enhanced FRS (Family Resources Survey) dataset by adding take-up rates to match official spending and caseload statistics for childcare programmes.

We target both aggregate spending and caseload figures for each programme in 2024, as shown in Table 8.

Table 8. Calibration targets for spending and caseloads (2024)

Programme	Spending target (£ billions)	Caseload target (thousands)
Tax-Free Childcare	0.6	660
Extended childcare	2.5	740
Targeted childcare	0.6	130
Universal childcare	1.7	490

We calibrate the model using an optimisation process to identify take-up rates that align with our targets. We define an objective function that quantifies the difference between simulated and target values for both spending and caseload. We then minimise this function to find the optimal take-up rates, ensuring the model reflects official statistics.

We integrate the optimised take-up rates into the Enhanced FRS dataset class. The model currently applies the take-up rates shown in Table 9.

Table 9. Childcare programme take-up rates in PolicyEngine

Programme	Take-up Rate
Tax-Free Childcare	0.58
Extended childcare	0.81
Targeted childcare	0.60
Universal childcare	0.56

We use these rates to randomly assign benefit units to each childcare programme, generating representative aggregate statistics. Based on the 2023 Childcare and Early Years Survey of Parents, the government reports that around 63% of children aged 0 to 4 used formal childcare.

To reach the target metrics for extended childcare, we impute hours claimed among households simulated to take up the program. We model the distribution of claimed hours using a normal distribution with a mean of 15.0 and a standard deviation of 5.0, bounded from 0 (exclusive) to 40 (inclusive).

This report explains how UK childcare programmes are modelled in PolicyEngine and linked to the codebase. Each programme’s rules are implemented through defined eligibility and entitlement conditions. We also present the impacts on household finances and income distribution. We invite you to explore the economic impacts of these childcare programmes using the PolicyEngine interface.