Childcare can be terrifyingly expensive prospect for parents and would-be parents. And a complex one too, with UK parents of under-fives facing a hodgepodge of overlapping schemes, rules, and exclusions.

Navigate this support system correctly, and even highly-paid mums and dads can save tens of thousands of pounds a year.

But play it badly – as many parents do – and you could end up working some of the lowest-paid hours of your life.

In fact even if you’re a parent who’s happy with your current arrangements, I’d urge you to run the numbers to make sure you’re getting the most for your money.

Let’s survey the territory.

Why parents need government support

First off, you might be wondering why any taxpayers’ money is going towards childcare in the first place?

Well I’d argue there are plenty of reasons for the state to provide some support. Not just for the sake of the parents, but to help society as a whole get the most from all its citizens.

At the sharp end, nurseries can easily cost £100 a day in London and the South East. Prices do vary around the country, but the minimum wage and legally defined staffing ratios means there’s little wiggle room to undercut competitors.

A 20-something earning the average salary of £34,724 takes home about £110 per day after tax. That’s only £10 more than that daily nursery fee.

Ouch!

And once you factor in commuting costs and time off when the child inevitably gets sick (and if you thought the nursery would waive the fee after sending them home, think again), a parent is in the red.

Now call me a hopeless romantic, but I’d like to think our economy is better served by encouraging young professionals to stay in work. This way parents continue developing skills, contribute to productive economic growth, and eventually become higher-rate taxpayers – rather than dropping out for several years just to look after children.

There’s also a straightforward numbers argument.

If a child is aged three or over, nurseries can operate at a ratio of one adult to eight children. That means eight parents can potentially remain in work, earning and paying tax. Not to mention the nursery worker who has a job and an income, and so makes a tax contribution of their own.

Compared to all those parents quitting work to provide childcare themselves, that’s nine taxpayers instead of zero!

And yet plenty of people – perhaps some to come in the comments to this article – argue that funding pre-school childcare is a costly extravagance.

There’s a demographic problem, too

As we’ve seen, given typical nursery costs and salaries it simply doesn’t pay for the average person to work and also send their child to nursery without government support.

And if a parent does give up work to look after a nursery-age child, then good luck them saving a deposit for a suitable family home near a decent school.

Without any government intervention, only a handful of groups could realistically afford to have children:

• The very wealthy
• Those fortunate enough to have healthy parents or in-laws who can all bear to live with each other
• People relying on benefits

Isn’t it curious that many of the same people who argue the state shouldn’t fund childcare are also unhappy about funding non-working families on benefits?

What’s more, if average young professionals are effectively shut out from having children then we face a looming income-tax gap. A missing cohort will never grow up to earn and pay taxes (and to fund pensions…)

I suppose we could fill the gap with mass immigration? That shouldn’t cause any controversy.

Know your limits

Do I think everyone should have unlimited access to free childcare?

No. But I do believe it’s worth recognising there are good reasons for providing some state support.

Unfortunately, given the political awkwardness of spending money at a time when we’re supposedly slashing everything except tax rates, perhaps it’s no surprise that the system we’ve ended up with is convoluted and unwieldy.

So what support can a working parent get?

First: Child Benefit

You receive £26.05 per week for the first child and £17.25 for subsequent children – £1,355 and £897 per year respectively.

However, this is clawed back for people with an adjusted net income over £60,000, at a rate of 1% for every £200 of income (since 2024). By £80,000, the entire amount has to be repaid.

On the plus side, if you do earn over the £60,000 threshold then you can treat it as an interest-free loan and repay it via self-assessment. (Possibly the most time-consuming form of stoozing yet devised!)

You receive this benefit whether or not you use nursery care, so I won’t dwell on it — but it’s worth being aware of.

Second: Tax-free childcare

As you’ll see, we do love giving these things stupid names.

Tax-Free Childcare lets you pay money into a ring-fenced account, with the government topping it up by up to £500 per quarter. Pay in £8,000 a year, and it becomes £10,000.

So it’s ‘tax-free’ in the sense that many people pay 20% income tax (we’ll ignore National Insurance and Scotland here) and the top-up is also 20%.

But if you ask me, that’s not exactly intuitive.

Also, that pesky adjusted net income business makes another appearance, too. If either parent earns over £100,000 then the family isn’t eligible.

And now for the big hitter…

Third: Free childcare for working parents

Bear with me, because in my opinion this is an absolute mess. I’ll even skip some darker corners and edge cases for the sake of brevity (and your sanity).

So… if your child is aged between nine months and four years – and if you meet a long list of conditions – then you’re entitled to 30 hours of free childcare per child, per week.

Sounds simple?

Gotcha!

Of course it isn’t.

Those 30 hours only apply during the 39 weeks of term time. If your family doesn’t conveniently cease to exist during school holidays, then many providers will ‘smooth’ these hours into 22.8 hours across 50 weeks.

Which leaves the remaining hours charged at full price.

Also, you might think nurseries would allow parents to take a couple of weeks’ holiday each year. But actually they’ve typically decided it’s much easier to just charge everyone all year round.

Still at least you get 22.8 hours free each week… right?

Well… not quite.

Providers are allowed to charge extra for food, nappies, and similar essentials. Which means in practice you’ll find yourself paying a seemingly arbitrary additional amount for those ‘free’ hours.

In my case, it works out at about £1 an hour. But it seems to vary according to the luck of the draw.

Starting to see why I question whether this really counts as ’30 hours per week of free childcare’?

Oh, and of course if one of your adjusted net incomes is over £100,000 then you’re not eligible anyway.

Funding childcare: in practice

Let’s consider Hannah, who has two children under five years old.

Hannah has found the cheapest (acceptable) local nursery charges £100 per day. That’s on the basis of a 10-hour day, 8am-6pm.

This enables Hannah to work her 9-5 job and make it back for pickup.

On paper then, Hannah is set to pay £1,000 per week to send her two kids to the nursery at full whack.

That’s £52,000 per year – well above the average gross salary of people in their 40s, let alone 20s.

(Perhaps better to delay getting frisky until the arthritis is setting in?)

Thankfully, state support can make a big dent in Hannah’s looming cash crunch.

Supposing Hannah and her husband Ben each earn £40,000 per year. That’s an above-average income, but it’s not so high that they can’t take full advantage of the three support mechanisms I outlined above: child benefit, tax-free childcare, and free childcare for working parents.  

I’ll ignore child benefit, since this is accessible whether they use nurseries or not and doesn’t change the maths. We’ll just look at the 22-odd hours a week of pseudo-free childcare and that ‘tax-free childcare’ account.

After the free childcare they’re paying per child:

• £10 for nappies and food on Monday
• £10 for nappies and food on Tuesday
• £80 for 2.8 free hours and 7.2 chargeable hours on Wednesday
• £100 for a chargeable day on Thursday
• £100 for a chargeable day on Friday

That’s £300 per week, or £15,000 for 50 weeks. Plus £1,000 for the unfunded two weeks. So £16,000 per year all-in.

They can also claim £2,000 per child in top-ups via Tax-Free Childcare.

That cuts the total bill to £14,000 per child – or £28,000 for the pair.

How much is Hannah actually earning?

Maths-savvy Monevator readers will notice that £28,000 is substantially less than the £52,000 bill Hannah and Ben faced without government support.

It might therefore seem churlish to protest further.

However this is still a lot of money going out – and a lot of running about from work to nursery to home and to bed.

So how does it compare to the alternative of one parent quitting work for a bit?

Let’s assume – with due deference to the potential for stereotyping – that of this particular couple, Hannah is the one who is more inclined to look after their children in place of work.

Of her £40,000 in annual pay, Hannah takes home a net £32,320.

Going down the childcare route, the £28,000 nursery bill we just calculated leaves her with £4,320 leftover from her £32,320.

Which means that across 260 working days, Hannah is effectively clearing just £17 each day.

Let’s hope she doesn’t have to spend that on a train ticket to get to her office.

Sick notes

Hannah’s effective earnings will only shrink further if she has to spend a week unpaid at home when one of the kids has a temperature.

Which will happen sooner or later. If you’ve ever experienced the joys of kids attending nurseries, you’ll know they will get coughs, colds, and temperatures. Constantly!

(Mind you those are a breeze compared to the norovirus.)

In any event, the nursery, of course, continues to charge whether the kid is there or not.

True, with no government support at all, even just one child in nursery will cost more than the average salary brings in. A parent would be more or less compelled to quit their job.

But in Hannah and Ben’s case – with two children and government support – there’s a choice to be had.

The benefits of working are still pretty marginal for Hannah though. At least in pure cash terms.

The fun of marginal tax

Here’s another scenario to ponder.

Let’s assume that Hannah’s employer is happy for her to work part-time.

On a pro-rate basis with respect to her £40,000 annual income, Hannah effectively earns £8,000 for each day of the week that she works. (That’s £40,000 / five days of course.)

But since the first £12,570 of that isn’t taxed at all thanks to the personal allowance – and National Insurance is in the mix too – reducing your income can have a big impact on your actual take home pay.

If Hannah drops her income by 20% – going from £40,000 to £32,000 per year – then her take home pay reduces from £32,320 to £26,560.

That’s a smaller fall of 17.8%. Not quite as bad as you might have expected?

If Hannah now sends the children to nursery only four days each week, the cost falls to £10,800 per child per year. With the benefit of ‘tax-free childcare’, that drops to £8,800 – or £17,600 for both of them.

We calculated earlier that, working five days per week, Hannah had an annual income surplus after nursery costs of £4,320.

Now – having reduced her net earnings to £26,560, and by looking after the kids for one day a week and subtracting £17,600 in nursery costs – Hannah is effectively bringing home £8,960 from staying in work.

That’s right! By dropping from five days a week in the office to four, Hannah ends up getting almost £5,000 extra cash into her purse over a year.

What’s more, cutting her days back to three leaves Hannah even further up on the deal:

Scenario	Gross Income	Net Income	Nursery annual cost	After Tax Free Child-care	Net benefit of working
Full-time work	£40,000	£32,320	£32,000	£28,000	£4,320
Four days work a week, one day childcare	£32,000	£26,560	£21,600	£17,600	£8,960
Three days work a week, two days childcare	£24,000	£20,800	£11,200	£8,960	£11,840

This is partly because the 30 hours support stops above 22.8 hours per week, which equates to two-and-a-bit days. Hence working for those fourth and fifth days are disproportionately expensive.  

Factor in the effective cap of ‘Tax-Free Childcare’ – which doesn’t help you further once costs go above £10,000 per year – and the fact that marginal tax rates mean your fourth and fifth days each week are effectively your least lucrative, and for Hannah more work really does not pay.

Paid more than £100,000?

The situation is even more diabolical.

With an adjusted income exceeding £100,000, Tax-Free Childcare isn’t available.  

You mostly aren’t eligible for any free childcare either (though you may get ’15 hours per week’ for children over three).

In the worst-case scenario, with children under-three, that means you’re losing out on 22.8 hours worth £10 each across 50 weeks – that is, £11,400 plus the £2,000 of tax free childcare.  

Which works out as £13,400 per child.

Also bear in mind that someone earning £100,000–£125,140 is paying a marginal tax rate of 60%.

What if you were earning £99,000 (£67,981 net), and your employer announced that you were receiving a £25,000 bonus. How much of that would you expect to keep?

Well that bonus is going to get taxed heavily due to that notorious 60% marginal tax rate. Hence you will take home £77,681 net.

But hey, that’s still £9,700 more than you had before, right?

Ahem… not so fast. Remember you have also lost £13,400 per child in government support.

Ah…

In the worst case, with two children under three, you actually end up £17,100 worse off than if you had never got that £25,000 bonus in the first place!

Of course you could decide to shovel your bonus into a pension, keep your adjusted net income under £100,000, and prepare for a life of champagne cruises once the kids have left home.

Also I’m not sure that I think people earning six-figure incomes should get more support with childcare, given all the other pressures on the state coffers, even after acknowledging this horrible maths.

But it is a good demonstration of how poorly thought through these various schemes are.

It’s entirely possible that it might be more profitable for talented high-earners in the prime of their careers to actually work less. Which is not exactly a recipe for improving Britain’s productivity crisis.

P.S. Your mileage may vary

Of course real-life is never quite as simple as raw numbers chosen to make a point in an article.  

For example, your employer might not even entertain the thought of enabling you to cut a day or two at the office, just to help with your ulterior motive of saving money on little Boris’ nursery fees.

Also consider that by quitting work for a bit – or even just by reducing your hours – you could miss:

• Promotion opportunities given only to full-time employees
• Career prospect-boosting special assignments
• Higher bonuses
• Matched pension contributions
• The cream of the office gossip

I can’t quantify what those are worth for you. But I can tell you my wife and I have faced this childcare challenge ourselves.

Neither of us wanted to give up our careers or to be full-time stay-at-home parents.

But I admit there was a moment when we sat down and looked at the numbers – and it seemed to be madness for one of us to schlep to work every morning just to earn the train fare and a sandwich.

Especially when a motivation for having kids was all the fun you can have by spending time with them.

If you’re a parent with young children, run your own numbers. You might be surprised how little you’re really exchanging your time for!

Duvet day at Monevator as we update our asset allocation quilt with another year’s worth of returns.

The resulting patchwork reveals the fluctuating fortunes of the major asset classes across a decade, and invites a question…

Could you predict the winners and losers from one year to the next?

Asset allocation quilt 2025

Data from JustETF, Morningstar, and FTSE Russell. January 2026

The asset allocation quilt ranks the main equity, fixed income, and commodity sub-asset classes for each year from 2016 to 2025 from the perspective of a UK investor who puts Great British Pounds (GBP) to work.

Here’s what you need to know to read the chart:

• Returns are nominal ¹. To obtain real annualised returns, subtract the average UK inflation rate of approximately 3.4% from the nominal figures quoted in the final column of the chart.

• Returns take into account the Ongoing Charge Figure (OCF), dividends or interest earned, and are reported in pounds.

• Again, these are GBP results. If our numbers differ from yours, check that you’re not looking at USD returns. (It’s either that or our minds have been obliterated from staring too long at the crazy pixel explosion above.) 

Shady business

While our chart may look like the worst pullover pattern ever, it does offer some useful narrative threads.

For starters we can see investing success is not as simple as piling into last year’s winner. The number one asset in one year typically plunges down the rankings the next. A reigning asset class has only held onto its crown for two consecutive years twice – broad commodities achieving the feat from 2021 to 2022 and gold from 2024 to 2025. 

Long periods of dominance are possible – gold has had a spectacular decade. The yellow metal has topped the table three times and only dropped into the bottom half twice in the past ten years (2017 and 2021). It’s even surpassed the annualised returns of US equities in the ten-year return column. Not bad for a lifeless lump of rock. 

But the investment gods are fickle. Gold was the second worst performer in the table when we first published our asset allocation quilt in 2021.  Which is as nothing to the 31-year bear market gold inflicted on its investors from 1980 to 2011. 

This isn’t some strange quirk that only pertains to shiny dubloons. Any investment can suffer multi-decade declines. That’s why diversification is so important. 

Getting defensive

Disillusionment with bonds has been a major talking point round these parts since the asset class crashed in 2022. 

Many Monevator readers have retreated into cash since then. 

But though cash (in the shape of money market funds) has beaten UK government bonds (gilts) since 2021, gilts have trashed cash over longer periods. 

Notice how badly money market lost to intermediate gilts from 2016 to 2020. Dig deeper into the historical record and you’ll discover that average gilt returns are twice as high as the money market’s. 

However, high inflation periods – as per 2022 to 2023 – are government bond Kryptonite.

Gold, commodities, and index-linked gilts are all good – if imperfect – countermeasures during inflationary episodes. 

Hence, it’s worth understanding the full range of defensive assets: nominal government bonds ², short index-linked government bonds, commodities, gold, and of course cash.

At least one of those asset classes usually rides to the rescue when the stock market chips are down. As ably demonstrated by the All-Weather portfolio and the Permanent Portfolio. 

A chequered past

Notice how commodities and gold occupy two of the top four places in the 10-year column right now. 

Yet broad commodities was at the foot of the table in 2021 – with gold joining it in table-propping ignominy, as previously mentioned. 

You can see from its returns how volatile broad commodities is: swinging from agony to ecstasy like a volcanic situationship. 

Gold is like that too, though it’s true nature is disguised by its current hot streak. 

Equities and longer-dated bonds can be just as fickle.

But what makes these odd bedfellows work together in a portfolio is their tendency to come good at different times. To cover for each other’s weaknesses. To deliver a decent overall result in the long run.

Diversification is less risky than betting the farm on whatever’s worked recently. 

Even US stocks can suffer lost decades. The S&P 500 lost 4% per year from 1999 to 2008 before grabbing the lead from the rest of the world in the aftermath of the Global Financial Crisis. 

Stitch in time 

However you weave your response to the challenges of investing, the asset allocation quilt makes it plain that the best way to anticipate the future is to be ready for anything. 

Instead of trying to predict next year’s winner, discover the strategic rationale that makes each of the main asset classes worth holding. 

Buy into the assets that suit your objectives and investing temperament then reap your reward when their day – or year – comes around again. 

Finally, as uncertainty abounds, let’s be thankful that if you banked on the default position of global equities then you did just fine.

In fact, more than fine over the last decade. That 12.8% annualised return – 9.5% in real terms – is phenomenal!

Take it steady,

The Accumulator

1. That is to say they are not adjusted for inflation.[↩]
2. Intermediate gilts in the table.[↩]

What caught my eye this week.

The formerly fêted fund manager Terry Smith has had a few rough years in the markets, but last year was a doozy.

The UK investors who once poured money into his flagship Fundsmith vehicle saw their domestic market deliver nearly 26% in 2025.

A global tracker – a better comparison for the free-roaming Fundsmith – delivered roughly 14%.

But Fundsmith managed just a 0.8% return.

Barely there, and handily outpaced by cash in the bank.

Never mind the returns, feel the quality

Now Terry Smith is a big and famously acerbic boy who has rained on many a parade over his long career. While the schadenfreude must be positively Wagnerian in some quarters and it’s never nice to kick a man while he’s down, he doesn’t need me defending him.

I will just a tad though.

Like Nick Train – another once-loved but now seemingly reviled fund manager ¹ – Smith invests exclusively in ‘quality’ type shares.

This doesn’t (just) mean ‘quality’ the way a car salesman might quip about that vehicle you’re eyeing up.

The quality factor describes a particular kind of company that boasts – among other things – high returns on equity, strong profit margins, and the ability to turn most of its profit into cash.

And since the reset of 2022, these kinds of companies have been in the doghouse. I know because I favour them with my stock picking myself. Although happily my returns in 2025 were an order of magnitude better than Smith’s. (But now I’m doing the schadenfreude dance…)

Of course, Smith and Train didn’t exactly call out the tailwinds that boosted their returns during the low interest rate era.

Worrywarts like me saw ‘bond proxy’ companies increasingly owned by weak hands who would rather be invested in bonds, and which were thus primed for a fall when interest rates rose.

Train in particular dismissed such concerns, while Smith just continued to talk like you’d need a lobotomy to own anything other than his favoured firms.

But when the reckoning came, those multiples duly corrected – and the share prices went south.

The evils of indexing

The fact that even good investors suffer when their style is out of favour is of course another of the many arguments for passive investing.

I’m one of diminishing band who still believes both Smith and Train have skill. But I also think most people should invest the bulk of their money in index funds, rather than bet their net worth on either the jockey or the horse they’re riding.

However Smith has continued to lend his voice to the chorus warning that those same index funds are part of a wider problem.

In his letter to investors this week, he recapped the now-common argument that the growing share of money invested in index funds is distorting the market, concluding:

…even if we are right in diagnosing this move to index funds as one of the causes of our recent underperformance and it is laying the foundations of a major investment disaster, I have no clue how or when it will end except to say badly.

He would say that, wouldn’t he? He’s an active fund manager.

Well no. The greatest active investor of all-time, Warren Buffett, cheerily urges people – including his wife – to put their money into tracker funds.

For my part, I am not sure exactly what I think.

It’s a 6-7

While Smith’s recap in his letter on the perils of excessive indexing is uncharacteristically muddled, I’ve read more persuasive arguments as to why the weight of money in index funds is distorting prices. At least at the margin and especially for the biggest companies. (Here’s the latest).

I’ve also read comprehensive counters too.

Now you may wonder why someone who has been writing a blog about both active and passive investing for 20 years cannot be more definitive about this?

The truth is the maths is non-trivial and it’d take a good chunk of time to separate theoretical outcomes from any real-world implications. So I’m leaving it to the investing titans to argue it out.

With that said, I’ve mentioned to my co-blogger The Accumulator that, on a gut level, I suspect indexing becoming mainstream will have some kind of downside. Apparent free lunches in investing always do.

But whether they will be enough to make any meaningful difference – let alone be something that should prompt everyday investors to return to paying the known cost of active investing – is another matter altogether.

On a practical level, if I was a passive investor I might favour equal-weighted funds a bit more, though that’s been a losing bet for years. Then I’d wait to see what happens!

There’s no world in which index funds crash while a preponderance of active funds soar, that’s for sure.

Remember, active funds basically are the market. ² If passive and index investing has been unduly inflating prices, then beyond the edge cases it’s doing it for all investors.

Have a great weekend.

[continue reading…]

1. At least judging by the comments I read on the Internet.[↩]
2. One caveat, which is what some of the anti-indexing arguments are based on, is if a company isn’t included in a popular index fund then it won’t get the same passive investing flows and active investor attention.[↩]