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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).  

Free childcare entitlements

Most government funding for childcare providers in England is delivered via the free childcare entitlements:

Following an announcement at the 2023 Spring Budget, the 30 hours entitlement is in the process of being extended to children aged from nine months to three years (with the same eligibility criteria):

  • Since 1 April 2024, eligible families of two-year-olds have been able to access 15 hours a week.
  • Since September 2024, eligible families of children aged nine months to two years have been 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 previous government estimated the expansion will cost £4.1 billion a year by 2027/28. By this time, the government expected to be spending around £8 billion on the early years entitlements, 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 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 department.

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

  • Three and four-year-olds: £5.88 per hour. The rate has fallen by 3% in real terms (when adjusted for inflation) since 2017/18 (in 2024/25 prices).
  • Two-year-olds: £8.28 per hour. The rate has increased by 21% in real terms since 2017/18 and by 35% since 2023/24.
  • Children under two: £11.22 per hour.

Autumn Budget 2024

At the Autumn Budget 2024, the government committed to the funding for the expansion of the 30 hours entitlement and said £1.8 billion would be provided in 2025/26.

However, it has been suggested that childcare providers may be particularly impacted by the changes to employer National Insurance contributions and the increases to the National Living Wage announced at the Budget.

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.

In its 2023 report on education spending, the Institute for Fiscal Studies think tank estimated that core funding for three and four-year olds would 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 would “have more resources compared with 2017/18, when core funding per-hour peaked”.

The report also highlighted that the government will control the price of around 80% of pre-school childcare (up from around 50%) 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 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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