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

  • 15 hours universal entitlement for all three and four-year-olds.
  • 15 hours 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 additional funding for maintained nursery schools.

In 2020-21, the early years block was worth around £3.7 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), which was introduced alongside the 30 hours extended entitlement in 2017. The formula determines the hourly per-child funding rate that each local authority is paid in respect of the two entitlements. In 2020-21, around £3.2 billion was allocated in respect of the two entitlements.

Local authorities are responsible for determining the actual hourly rate paid to early years providers in their area using a locally determined funding formula (they may also retain some of their funding for central administration costs). However, there are several requirements on how local authorities are able to allocate funding to providers (for example, applying a universal base rate for all their childcare providers in their three and four-year-olds funding formula).

EYNFF funding rates since 2017-18

When the EYNFF was introduced, the Government provided additional funding to increase the average hourly funding rate from £4.56 in 2016-17 to £4.94 in 2017-18. No major changes were made to the hourly funding rates in 2018-19 and 2019-20. For 2020-21, the Government said it would use additional funding announced at the Spending Round 2019 to increase the hourly funding rate for the 3 and 4 year old entitlement by 8p “in the vast majority of areas”.

At the 2020 Spending Review, the Government announced that it would provide “£44 million for early years education in 2021-22 to increase the hourly rate paid to childcare providers for the government’s free hours offer.” At the time of writing, it had not been announced how the funding rates paid to local authorities would be changed as a result of the extra funding.

Funding for maintained nursery schools

Like other early years settings, maintained nursery schools (MNS) receive funding from central government (via their local authority) for the three childcare entitlements. However, in recognition of the higher costs faced by MNS compared to other early years providers (e.g. the requirement to employ a headteacher and qualified teachers), since the introduction of the EYNFF in 2017-18 the Government has provided additional supplementary funding to MNS. This supplementary 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 coronavirus outbreak

The Government has announced a range of measures aimed at supporting the early years sector financially during the coronavirus outbreak, including, but not limited to, continuing to pay funding to local authorities for the early education entitlements during any periods of closures, and basing early years funding for local authorities for autumn term 2020 on pre-coronavirus levels of attendance.

Funding levels and providers’ financial sustainability

Representatives of childcare providers were contending prior to the coronavirus outbreak that early years funding was not sufficient to cover the increasing costs of provision, including, for example, increases in the national living wage. The coronavirus outbreak has impacted financially on the early years sector, including because of enforced closures during the national lockdown and lower levels of attendance since then, and due to the costs of infection prevention and control measures. This has added to concerns about the financial sustainability of providers.

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.

In its 2020 annual report on education spending in England, the Institute for Fiscal Studies stated that real terms spending per hour on the 3 and 4 year old entitlements has been falling since 2017-18 and in 2019-20 stood at the same level as in 2016-17. It added that “most local authorities are due to see another small drop in real-terms hourly funding rates in 2020–21, though the impact of this on providers will be dwarfed by the financial consequences of COVID-19.”

Childcare funding is a devolved matter; this paper applies to England only.

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