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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 £3.55 billion.

Early Years National Funding Formula

Government funding for the 15 and 30 hours entitlements is determined using the early years national funding formula (EYNFF). While the EYNFF determines local authorities’ funding allocations, each authority determines the hourly rate paid to early years providers in its area using a locally determined funding formula. There are, however, a number of requirements that authorities must follow when allocating funding to providers.

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, 6p in 2021/22 and 17p in 2022/23.

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 funding to maintained nursery schools. This funding was initially intended to last for two years only but has been subsequently extended. The Government has said the supplementary funding will continue in 2022/23 and will be increased in line with the increase in the funding rate for 3 and 4-year-olds.

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 has included basing local authority early years funding on pre-coronavirus levels of attendance up to the end of the autumn term 2020. For the spring term 2021, funding was based on current attendance, but with provision for some top-up funding where attendance increased. Funding for the 2021/22 financial year was based on termly attendance counts. From 2022/23 the Government will revert to the normal process of allocating funding based on the January early years census.

The Government has also announced funding to support education recover from the impact of the pandemic. 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, debates over whether early years funding is high enough pre-date the pandemic. The Institute for Fiscal Studies (IFS) has stated “this is an extremely difficult question to answer, not least because there are different definitions of ‘high enough’.”

Concerns have been raised that some early years providers are being forced to close as a result of financial pressures. Ofsted data shows the number of registered providers fell by around 5% between 1 April 2020 and 31 July 2021. However, the Government has said the overall number of childcare places had stayed broadly the same and there is not a systemic shortage of places.

IFS 2021 annual report on education spending

In its 2021 annual report on education spending in England, the IFS noted a “significant amount of new money for the early years” was committed at the Spending Review 2021. It added, however, that the core funding rate for 3 and 4-year-olds in 2022/23 will only be around 3p higher in real terms once inflation is taken into account. Once additional pressures from above inflation increases in the national living wage and the new health and social care levy are taken into account, the report said, “providers look set for several more years of very tight finances.”

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