The Big Squeeze: how the UK’s parental leave system squeezes family finances

Having a baby is expensive. But our new research shows that it is not just the additional costs of a new baby that put pressure on families. The design of the UK’s parental leave system can dramatically reduce household income, while placing most of the financial impact on mothers.

Our new report, The Big Squeeze: First-time UK parents’ finances in their baby’s first year, explores what happens to the finances of two typical first-time parent couples: one where both parents work full-time for the National Living Wage, and one where both are on average earnings.

We looked at their income before having a baby, what happens to it when they take maternity and paternity leave, and the additional costs they are likely to face during their baby’s first year. The findings are stark.

A big drop in family income

If both parents take their maximum leave under the current system, an average-earning couple sees their joint income fall by around 34%, from £65,621.57 to £43,300.48. For a couple where both parents earn the National Living Wage, their joint income falls by around 30%, from £42,728.88 to £29,894.46.

At the same time, their costs increase. We estimate baby-related costs in the first year at £3,356.70, including one-off purchases such as a cot, pram and car seat, and ongoing expenses including nappies, clothes, formula, books and toys. Put those falling incomes and increased costs together, and the squeeze becomes substantial.

For a couple earning the National Living Wage, an estimated annual household surplus of £12,912.61 before having a baby becomes a deficit of £8,645.44 if both parents take their maximum leave. For an average-earning couple, a pre-baby surplus of £35,805.30 falls to just £4,760.58.

But it is mothers who take the hit

The financial impact is far from equally shared between mothers and fathers.

If a mother takes the full 52 weeks of maternity leave, our modelling suggests her income falls by 57.9% if she earns the National Living Wage and by 67% if she is on average earnings.

A father taking his two weeks of statutory paternity leave, meanwhile, loses less than 3% of his annual income.

That huge difference reflects the way our parental leave system is designed.

Mothers have a long period of leave available to them, much of it poorly paid or unpaid. Fathers have just two weeks of statutory paternity leave.

The financial incentives are therefore clear. Mum takes the time away from work to care for the baby. Dad keeps earning.

This matters beyond the immediate impact on the family bank balance. The first year is when patterns of earning and caregiving are established that can shape family life for years to come.

What happens if parents make different choices?

Our modelling explores several different ways parents could organise their leave.

Returning to work after 39 weeks of maternity leave rather than taking the full 52 weeks improves household finances, although families then face childcare costs.

For couples on the National Living Wage, saving before their baby arrives can be crucial. Depending on the leave scenario they choose, our modelling suggests they may need between £5,000 and £9,000 in the bank to cover their costs during the first year.

That is a substantial sum for a household on the National Living Wage to find.

And the underlying problem remains. Under the current system there is little financial incentive for couples to share earning and caregiving more equally.

Six weeks for dads could make a difference

That is why we have also modelled what would happen if fathers had access to six weeks of well-paid leave.

Our proposal would give fathers six weeks paid at 90% of their usual earnings. They could take two weeks around the birth and another four weeks later in the baby's first year as a ‘daddy month’.

This would give fathers the opportunity to spend a substantial period as their baby's main caregiver, including taking over when their partner returns to work.

Our modelling finds that this could help reduce the financial squeeze.

For an average-earning couple, a scenario in which the mother returns to work after 39 weeks and the father then takes his four-week daddy month reduces the gap between their pre-baby and first-year household finances to £23,135.19. That is 25% smaller than if they take their maximum leave under the current system.

For a National Living Wage couple, the equivalent gap falls to £16,964.36, 21% smaller than under the maximum-leave scenario.

But this is about more than money.

Giving fathers a meaningful period of well-paid leave would give families a genuine choice about how they share earning and caregiving during their baby's first year.

At the moment, for too many families, that choice simply does not exist.

Read The Big Squeeze

Our full report sets out the calculations behind these findings, explores different parental leave scenarios and makes recommendations for parents and government.

You can also read our four-page quick summary for the headline findings.

Read The Big Squeeze and download the report.