Free childcare hours could save you £4,882 a year

• Parents can now apply for free childcare hours for nine-month-olds
• On average this will save parents in England almost £3,500 a year
• The highest saving, in inner-London, is £4,882 a year
• If you invested the money you could generate £23,000 by your child’s 18^th birthday

Laura Suter, director of personal finance at AJ Bell, comments:

“Parents will receive the next tranche of government free childcare hours from September, providing a helpful boost to their finances. The extension means that parents of children as young as nine months old will be able to claim 15 hours of free childcare at a nursery or childminder, and they can now apply for this. But it’s tricky for parents to work out exactly how much they will save by using the government handout.

“Based on average nursery costs, parents will save almost £3,500 a year on their fees thanks to the government boost. This is based on parents being eligible for the full 15 hours for term-time only – amounting to 38 weeks of the year. But there are a few caveats to this. The first is that childcare costs vary hugely around the country. Inner London costs are the highest, which means that on average parents in that area could save up to £4,882 a year in nursery fees – although as this is the average some parents could save more. On the flipside, those living in the East Midlands pay the lowest costs in the country on average, and so the new free hours will save them £2,855 a year on average.

“The other caveat is that often parents will be charged some additional fees when claiming the free hours. The government pays nurseries a set hourly fee for the funded hours it pays for, and often this is below what nurseries would charge parents. While childcare providers aren’t allowed to charge explicit top-up fees, many will levy activity fees, meal charges or nappy costs to help make up the shortfall. This means the savings might not be quite as high as some parents are expecting.”

How much you could make by investing the money

“For some parents the free childcare hours will be a lifeline in helping their stretched household budgets, and for others it will mean they can return to work, as childcare costs won’t be such a large barrier to re-entering employment. However, some households will have been paying these childcare costs already and so could save the surplus money they are now making.

“If parents invested the saving they make as a result of the free hours being introduced they could generate a healthy pot of money for their child by their 18^th birthday. Assuming that parents make the average saving in England of £3,478 a year* for three years before their child goes to school, they could generate a pot worth just over £23,000 by their 18^th birthday – assuming investment growth of 5% a year. If parents continued making this saving each year even after their child started school, they could hand their child a pot worth almost £109,000 by their 18^th birthday.”

*Assumes that fees rise by 2% a year, and so the annual saving rises by 2% a year. Based on parents contributing the annual saving for three years and then leaving the pot untouched, with no further contributions, until the child turns 18.

How the free childcare hours work

From September parents can claim 15 hours a week for children from nine months and older, but until then the free hours are available for two-year-olds and older. If your child is three or four they could be entitled to 30 hours of free childcare. To be eligible both parents have to be working and earning at least £183 a week each. However, for parents of two-year-olds and younger they lose all their free hour entitlement when either of them earn more than £100,000 (minus any pension contributions). For parents of three and four-year-olds the free hours entitlement drops from 30 hours a week to 15 hours a week once either parent earns more than £100,000.

You have to actively claim the free hours, through the government gateway, rather than the hours being automatically awarded. You can also only claim from the start of the term after your child reaches the eligible age. So, for example, if they turn nine months at the start of October you won’t be able to claim until January. If you haven’t applied by the start of the term you have to wait until the start of the following term to claim it. For example, anyone who misses the cut-off to claim for September will only be able to get the free hours from January.