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In this briefing ‘childcare’ is used to refer to early education and childcare for children from infancy until they start school (around age five).  

Entitlement to free childcare

Before April 2024, most Government funding for childcare providers in England was delivered via three free childcare entitlements:

Expanding the 30 hours entitlement

At the 2023 Spring Budget, the Government announced the 30 hours entitlement will be extended to children aged nine months to three years in England, with the same eligibility criteria. The extension is happening in stages:

  • From 1 April 2024, eligible families of two-year-olds have been able to access 15 hours a week.
  • From September 2024, eligible families of children aged nine months to two years will also be able to access 15 hours a week.
  • From September 2025, all eligible families with children aged nine months to three years will be able to access 30 hours a week.

The Government estimates the expansion will cost £4.1 billion a year by 2027/28. By this time, the Government expects to be spending around £8 billion on the early years entitlements in total, around double what it spent in 2023/24.

Funding rates

Funding for the childcare entitlements is distributed to childcare providers in two stages:

  1. The Department for Education (DfE) provides funding to local authorities in the ‘early years block’ of each authority’s dedicated schools grant.
  2. Local authorities then distribute funding to providers in their areas, within a framework set by the DfE.

The national average hourly funding rates for local authorities in 2024/25 are:

  • Three and four-year-olds: £5.88 per hour. This is an increase of 16.7% in cash terms since 2022/23. However, the rate fell by 9.3% in real terms between 2017/18 and 2022/23 (in 2022/23 prices).
  • Two-year-olds: £8.28 per hour. The rate has increased by 43.5% in cash terms since 2022/23. However, it fell by 2.9% in real terms between 2017/18 and 2022/23.
  • Children under two (from September 2025): £11.22 per hour.

At the 2024 Spring Budget, the Government confirmed it would increase the hourly funding rates in line with its forecast of cost increases in 2025/26 and 2026/27 (based on average earnings growth, the National Living Wage, and the Consumer Price Index measure of inflation).

Commentary on funding levels

DfE analysis published in December 2023 suggested the mean income-to-cost-ratio (total weekly income divided by total weekly cost) for early years providers in 2022 was £1.15 of income per £1 of cost. The median income-to-cost ratio was £1 of income per £1 of cost, meaning half of providers reported income that did not fully cover their costs.

The Institute for Fiscal Studies (IFS) think tank has estimated that core funding for three and four-year olds will be 12% lower in 2024/25 than in 2012/13, once childcare providers’ specific costs are taken into account. In comparison, it estimates that providers catering for two-year-olds will “have more resources compared with 2017/18, when core funding per-hour peaked”.

The IFS also highlighted that the Government will control the price of around 80% of pre-school childcare (up from around 50% now) once the expanded 30 hours entitlement is fully implemented. This, it says, increases the importance of getting the funding rates right. It says the Government’s planned funding rates for two-year-olds and under twos “are well above market prices”. However, the funding rate for three and four-year-olds “aligns more closely with existing market rates, posing potential challenges in areas where funding and provider costs diverge.”

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