Gordon Brown bowed to backbench pressure last night and ditched plans to scrap tax relief on childcare vouchers.
But the shift means that Labour will not be able to achieve the big expansion of free nursery places for two-year-olds that it had planned.
Mr Brown announced at Labour’s annual conference that the relief would be phased out from 2011 to fund the expansion of free nursery places for two-year-olds in poorer families.
But after what officials called a concession, not a U-turn, the vouchers will not be scrapped, but the tax relief on all of them will be applied at the basic rate of 20 per cent.
At present, higher-rate taxpayers receive relief at 40 per cent, with the result that the richest 6 per cent of eligible parents enjoy 33 per cent of the benefits.
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A Downing Street source said that the Prime Minister made clear he was in “listening mode” on the issue and decided to make the concession after Labour backbenchers raised concerns over the plan.
All existing users of the scheme will continue to receive tax relief on their childcare. The new policy will apply to new entrants to the scheme from 2011.
The change will mean Mr Brown cannot achieve his ambition of providing free nursery places for 250,000 two-year-olds by 2015, but the number of places will still be tripled, said the source.
An official said: “This is a victory for Labour backbenchers but it does not cost the Treasury anything. It means there will be fewer nursery places than we wanted. It is not as we wanted.”
Nine former ministers led by Patricia Hewitt rebelled against the move, along with about 50 other Labour MPs.
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The original announcement had appeared to clash with Mr Brown’s recent pledge to stand up for the “squeezed middle classes” rather than just for Labour’s natural constituency of poorer and struggling families.
Labour officials said then it would be of particular benefit in London because of the very high cost of childcare there. Officials then said employer-supported childcare benefits wealthy families much more than the poor. A third of the tax relief — about £200 million — goes to higher-rate taxpayers earning more than £40,000.
The plan would have given free access to 3,000 children’s centres such as Sure Start or the ability to claim for places in quality private nurseries. Mr Brown said the move was “for all those mums and dads who struggle to juggle work and home”.
The announcement had been planned for the Pre-Budget report next Wednesday but officials confirmed the change of heart after it began to leak out.
Some 92,336 people have signed a petition on the 10 Downing Street website urging Mr Brown not to scrap the relief. A parliamentary motion defending the vouchers was signed by 88 MPs, enough to threaten Mr Brown’s majority in a Commons vote.
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Conservative families spokeswoman Maria Miller said: “The Government’s childcare policies are in chaos. Despite the rhetoric about being family friendly, all we seem to get in practice is underfunded policies and U-turns.
“The Government has shown neither consistency nor honesty when it comes to childcare. This Government is more concerned with creating dividing lines than helping parents. Parents and early years providers deserve better.”
Mr Brown is sending letters to Labour MPs who expressed concern over the plan to scrap tax relief, explaining the change in policy.
Ms Hewitt said she had not yet received her letter, but told BBC Radio 4’s PM: “I am delighted. I think Gordon Brown and the Government have made the right decision on this.”
The new policy would allow the Government to continue to give families tax relief on their childcare costs but in a fairer way than the current system, she said.
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Mr Brown’s aim of free nursery places for two-year-olds was “a very good goal”, said Ms Hewitt.
But she added: “What we were unhappy about was robbing one group of families in order to support another, and I think although the Government — reasonably — is saying we are going to have to go a bit slower on the introduction of nursery places for two-year-olds, it has come to the right conclusion.”