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The majority of Government funding for early years providers in England is delivered via three childcare entitlements:

  • 15 hours universal entitlement for all three and four-year-olds.
  • 15 hours entitlement for disadvantaged two-year-olds.
  • Extended 30 hours entitlement for three and four-years-olds of eligible working parents.

Funding for the entitlements is included in the Early Years Block of each local authority’s Dedicated Schools Grant (DSG). Additional Government funding for disadvantaged children (Early Years Pupil Premium) and children with additional needs (Disability Access Fund) is also included in the Early Years Block, along with supplementary funding for maintained nursery schools.

In 2021-22, the early years block is worth around £3.73 billion.

Early Years National Funding Formula

Government funding for the 15 hours universal entitlement and the 30 hours extended entitlement is determined using the early years national funding formula (EYNFF). In 2021-22, around £3.2 billion was allocated in respect of the two entitlements.

While the EYNFF determines a local authority’s funding allocation in respect of the universal and extended entitlements, local authorities determine the actual hourly rate paid to early years providers in their area using a locally determined funding formula. There are, however, a number of requirements that authorities must follow when allocating funding to providers.

EYNFF funding rates since 2017-18

When the EYNFF was introduced, the Government provided additional funding to increase the average hourly funding rate for the 3 and 4 year old entitlements from £4.56 in 2016-17 to £4.94 in 2017-18. No major changes were made to the funding rates in 2018-19 and 2019-20. Additional funding was used to increase the rates in the “vast majority of areas” by 8p in 2020-21 and by a further 6p in 2021-22.

Funding for maintained nursery schools

In recognition of the higher costs they face compared to other early years providers, since the introduction of the EYNFF in 2017-18 the Government has provided additional supplementary funding to maintained nursery schools. This funding was initially intended to last for two years only but has been subsequently extended and is currently committed up to the end of 2021-22 financial year. Around £60 million of supplementary funding will be provided in 2021-22.

Further information on other funding provided outside of the EYNFF is provided in section 4 of this briefing.

Financial support during Covid-19 pandemic

The Government has announced a range of measures aimed at supporting the early years sector during the Covid-19 pandemic. This included basing local authority early years funding for autumn term 2020 on pre-coronavirus levels of attendance. However, since the spring term 2021, funding has been based on current attendance, but with provision for some top-up funding where attendance increases.

The Government has also announced around £3.1 billion of funding to support education recover from the impact of the pandemic in England. This has included funding for an early language programme for nursery aged children and training for early years practitioners. The Sutton Trust has called for the early years to “form a central plank” of the education recovery.

Funding levels and providers’ financial sustainability

The Covid-19 pandemic has created financial challenges for early years providers. However, there has been debate over whether early years funding is high enough for a number of years. The Institute for Fiscal Studies has stated that “this is an extremely difficult question to answer, not least because there are different definitions of ‘high enough’.”

An October 2020 Department for Education report on the finances of early years providers in 2019 (i.e. before the coronavirus outbreak), found that the mean income-to-cost-ratio (total weekly income divided by total weekly cost) for all providers was 1.42 in 2019 (1.37 for all providers excluding childminders). It also found, however, that the median income-to-cost ratio (the middle observation when providers are ranked from lowest to highest) was 0.99, indicating that half of providers were around or below the breakeven point where total costs equal total income.

Statistics published by Ofsted show that the number of registered early years providers fell from 75,068 to 71,426 between the end of March 2020 and the end of June 2021. The statistics do not indicate the reason why a provider closed.

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