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How is early years provision funded?

The majority of Government funding for early years providers in England is currently 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. From April 2024, the 30 hours entitlement will be extended in stages to children aged nine months to three years.

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 financial year 2023-24 the initial funding allocation for the Early Years Block was around £3.9 billion.

Funding rates

Government funding for the three childcare entitlements is determined using two separate funding formulas:

  • Funding for the 15 and 30 hours entitlements for three and four-year-olds is determined using the Early Years National Funding Formula (EYNFF).
  • A separate formula is used to determine funding for the two-year-old entitlement.

The formulas determine the hourly per-child funding rate each local authority is paid in respect of the entitlements. This is then multiplied by the number of children taking up the entitlements to determine a local authority’s funding allocation.

The spreadsheet published alongside this briefing details the funding rates for individual local authorities for each financial year from 2019-20 to 2022-23.

The actual funding rate paid to early years providers in an area is determined by the local authority, within a statutory framework.

Increase in funding rates from September 2023

At the Spring Budget 2023, the Government said it would provide additional funding to increase the hourly funding rate for the existing childcare entitlements. £204 million will be provided in 2023-24 (paid from September 2023 via the Early Years Supplementary Grant) and £288 million will be provided in 2024-25.

As a result of the additional funding, the national average funding rate for the three and four-year-old entitlements increased from £5.29 per hour to £5.62 per hour from September 2023. The national average funding rate for two-year-olds increased from £6.00 per hour to £7.95 per hour.

Extension of 30 hours entitlement

At the Spring Budget 2023, the Government announced the 30 hours entitlement will be extended in stages from April 2024 to children aged nine months to three years in England. Eligibility will match the existing entitlement: it will be available only for the children of working families.

By 2027-28, the Government will provide around £4.1 billion to fund the extension of the 30 hours entitlement.

A new funding formula will be introduced to calculate funding rates for children aged two and under, including those eligible for the entitlement for disadvantaged two-year-olds. In November 2023, the Government confirmed the national average per-child funding rates for 2024-25:

  • £5.88 for three and four-year olds, up from £5.62
  • £8.28 for two-year-olds, up from £7.95
  • £11.22 for children aged under two

While the extension of the 30 hours entitlement to younger children was broadly welcomed, concerns were raised that the funding committed may not be sufficient. It has also been highlighted that, as the Government becomes responsible for funding a greater proportion of pre-school childcare, the importance of getting the funding rate right increases.

Funding for maintained nursery schools

Since the introduction of the EYNFF in financial year 2017-18 the Government has provided additional funding for maintained nursery schools (MNS) in recognition of the higher costs they face. The Government made changes to the way this supplementary funding for MNS is distributed from 2023-24. An additional £10 million of supplementary funding was also provided. In 2024-25, around £85 million of supplementary funding will be provided.

Further information on other sources of funding for early years provides, including the Early Years Pupil Premium, is provided in section four of the briefing.

Commentary on funding levels

Whether early years funding is high enough has been the subject of debate since well before the Covid-19 pandemic. The Institute for Fiscal Studies (IFS) has said this is “an extremely difficult question to answer, not least because there are different definitions of ‘high enough’.”

Department for Education analysis published in April 2022 suggested the mean income-to-cost-ratio (total weekly income divided by total weekly cost) for early years providers was 1.25 in 2021. The median income-to-cost ratio was 0.96, meaning half of providers were at or around the breakeven point.

The Institute for Fiscal Studies (IFS) has estimated that core funding for three and four-year olds was 17% lower in 2022-23 than a decade previously, once childcare providers’ specific costs are taken into account. It estimates funding for two-year-olds was no higher in 2022-23 than when the entitlement was introduced in 2015-16.

Are there enough childcare places?

There is a debate as to whether financial pressures in the early years sector are forcing providers to close and negatively affecting childcare sufficiency.

The number of registered early years providers has fallen steadily since 2015 and there was a net overall decrease of around 3.320 providers between
31 August 2022 and 31 August 202
3. Most of the decline was due to a fall in the number of childminders. The number of places offered by providers on the early years register has also declined, but at a slower rate than the number of providers.

Ofsted has said the decrease in the number of childcare providers may “in part be caused by the considerable decrease in the birth rate. There are also more parents working from home, which may reduce demand for childcare places.”

The Government has said the number of places offered by providers has remained broadly stable and it has regular contact with local authorities about their sufficiency of childcare and any issues they are facing.

Education Committee report

In July 2023, the Education Committee published a report on support for childcare and the early years. The report said the free entitlements are “chronically underfunded” and this “is a significant causal factor in the increasing rate of provider closures.”

While the Committee welcomed the extension of the 30 hours entitlement, it said the sector needs “a sufficient funding rate” in order to successfully deliver the proposals.

Among other things, the report recommended the Government work with childcare providers and local authorities to set the funding rates at a sufficient level.

The Government’s response to the report was published in October 2023. The Government recognised the importance of setting funding rates at the correct level and said data from surveys of providers is used to “support [its] understanding of the costs of delivering childcare and helps to inform the overall quantum of funding required for delivering the early years entitlements.”

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