COMPLAINT TO THE DEPARTMENT FOR EDUCATION
Regarding: Early Years Funding Rate Methodology, Failure of the Public Sector Equality
Duty, and Flawed Evidence Base

Submitted by: Early Years Providers — England
Date: May 2026

The Rt Hon Bridget Phillipson MP
Secretary of State for Education
Department for Education
Sanctuary Buildings
Great Smith Street
London SW1P 3BT

cc: The Rt Hon Rachel Reeves MP, Chancellor of the Exchequer, HM Treasury, 1 Horse
Guards Road, London SW1A 2HQ

Dear Secretary of State,

We write to submit a formal complaint against the Department for Education concerning a sustained, systematic and, in our submission, unlawful failure in its administration of the Early Years Entitlement, encompassing flawed and ignored evidence, failure of the Public Sector Equality Duty, the deliberate suppression of provider transparency, the compelled loss-making of an overwhelmingly female workforce, and a structurally unequal funding settlement that has never been subjected to independent scrutiny. This complaint is submitted on the advice of the Competition and Markets Authority (CMA), which directed providers to formally raise concerns with the DfE as the appropriate first step before escalating to the Parliamentary and Health Service Ombudsman.

We submit that the DfE has:

(1) set funding rates using a flawed and incomplete evidence base;

(2) failed its obligations under the Public Sector Equality Duty (PSED) as set out in the Equality Act 2010; and

(3) demonstrated, at the most senior level of its early years funding team, a fundamental misunderstanding of provider cost structures that calls into serious question the integrity of the methodology that has governed early years funding for nearly a decade.

(4) Marketed as the early years entitlement to parents worth £8000 per year while simultaneously prohibiting providers from assigning any monetary value to the same hours on invoices (usually a significantly lower value), a contradiction that becomes
acute in the context of the Secretary of State’s recent referral of providers’ ‘hidden costs’ to the CMA.

(5) The prohibition on top-up fees, imposed alongside a funding rate the government has known to be below cost since 2015, constitutes a compelled loss-making with no transparent mechanism of cost recovery, and the ‘hidden costs’ now referred to the CMA are the direct and entirely predictable consequence of that prohibition.

(6) Excluded properly calculated business costs from the funding rates, yet prohibited any form of charging to cover the gap.

(7) Orchestrated a hugely damaging propaganda campaign at the tax-payer’s expense.

Section 8 outlines actions and outcomes that the sector as a whole would like to see implemented.

We request: an independent review of the early years funding rate methodology; a properly conducted Equality Impact Assessment specifically addressing the funding rate and its effect on a predominantly female workforce; and a substantive written response to the specific failings set out in this complaint. We ask that the Government refrain from advertising our services to parents as ‘free’ when they are neither adequately funded nor take into account the different cost bases borne by settings of different types.

1. The Funding Gap: A Known and Documented Failure

Independent sector research commissioned by the DfE and conducted in 2015 predicted that an adequate funding rate for three- and four-year-old provision would need to be at least £7.49 per hour by 2020 (Early Years Alliance). This research was shared with the DfE.

The Department proceeded to set — and has continued to set — rates materially below this figure. It has now been eleven years since that research was conducted and ignored. In the following Early Years Spending Review (dated 27 October 2015), in which the Government desperately tried to find ways to reduce this amount by drastically lowering the quality of care to children, it admits:

“If providers are not able to manage down their staff numbers, as we assume, then they may not be able to continue to deliver the entitlement by 2020/2021” (Early Years Spending Review, October 2015)

The implications of this timeline are serious. The DfE had this evidence before the current funding formula was introduced in 2017. Inadequate rates were not an oversight; they were brought in with full knowledge of the DfE’s own independently evidenced cost base. Adjusted for inflation from 2015, the £7.49 figure would be worth approximately £10.50–£11.00 in 2026. The real funding gap is not £7.49 versus £6.12; it is over £10.50 versus £6.12 for three and four-year-olds, and considerably worse where rates fall below £5.50 in many areas of the country. This is half the rate needed to provide the high-quality care
which the Government claims it wishes children to have.

Clearly, this is not a funding shortfall that arose from unforeseen circumstances. The Department had clear, independent evidence that its rates were inadequate before it even set them, and has proceeded regardless for eleven years. Under the legal test for irrationality in Judicial Review, it is significantly harder to establish a rational basis for a decision when contrary evidence was available, presented to the decision-maker, and ignored, let alone when that evidence predates the policy itself.

Furthermore, in the financial year 2025–26, the Treasury increased provider costs by approximately 11% through increases to the National Minimum Wage and changes to employer National Insurance Contributions (including a lower starting threshold). In the same period, the funding rate was increased by just 3%. The gap between the cost increases imposed by the government and the funding it provided widened materially in a single year.

Yet to add insult to injury, this was the year that the DfE came down hard on consumable fees and the Labour Party Leader complained about ‘rip-off nursery fees’. The other major issue with the funding is the flawed methodology used in the Early Years National Funding Formula (EYNFF). This creates deeply unfair tiers of funding rates nationwide that bear no relation to actual cost differentials across the country. A rural county such as Lincolnshire receives £5.71 per hour for three- to four-year-olds, £7.81 for two-year-olds, and £10.58 for under-twos, while inner London Westminster receives £8.77, £12.43, and a staggering £17.44 per hour. Minimum wages are national, not regional. Costs in large cities such as London may be higher than in rural areas elsewhere; however, London weighting and rentals don’t account for a 75% uplift.

Westminster has a disproportionate number of parliamentarians, civil servants and policymakers living and working there. It receives some of the highest early years funding rates in England. We do not suggest that this reflects conscious preferential treatment. However, we submit that this is consistent with a funding methodology that responds to proximity to power rather than to an objective assessment of need or cost. A system that delivers its highest rates to the borough of those who set the rates, while leaving providers elsewhere unable to cover their costs, has an appearance problem that an independent review would need to address.

2. Failure of the Public Sector Equality Duty
The early years workforce in England is over 97% female. This is acknowledged in the DfE’s own research. Gender is a protected characteristic under the Equality Act 2010. The Public Sector Equality Duty (PSED) requires the DfE, when making decisions, to have “due regard” to the need to eliminate discrimination and advance equality of opportunity. “Due regard” is not a box-ticking exercise. It requires genuine, informed engagement with equality impacts before decisions are made. We submit that the DfE has failed this duty on the following grounds:

• Systematic undervaluation of skilled work: The funding rate methodology treats early years provision as basic care rather than trained professional pedagogy. Early years practitioners hold formal qualifications, carry statutory safeguarding duties, deliver the EYFS framework, and bear legal responsibility for child welfare. A builder’s labourer (who requires no formal qualifications) earns approximately £35,000–£45,000 per year. An assistant nursery manager, holding level 3 qualifications and carrying significant legal responsibility, typically earns £27,000– £29,000. The funding rate embeds an assumption that this skilled, femaledominated work is worth less. This assumption would not withstand scrutiny if applied to a male-dominated profession of comparable skill and responsibility.

• The systemic undervaluation of this workforce is compounded by the language and framing that the government itself employs. The term ‘childcare’ is used consistently in Government communications, legislation and policy, which fundamentally misrepresents the nature of the work. Early years professionals are not babysitters. They are trained and qualified professionals, graduates and postgraduates delivering a statutory educational framework during the most critical period of neurological development in a child’s life. Research consistently shows that the quality of early years provision has a greater long-term impact on outcomes than any subsequent stage of education. The language of ‘care’ rather than ‘education’ or ‘pedagogy’ is not semantic; it shapes public perception, depresses wage expectations and provides political cover for a funding methodology that treats skilled professional work as unskilled labour.

• The government has actively pursued policies to ‘lower barriers to entry’ to the early years sector. In any other professional context, it would be recognised as a proposal to reduce standards. In the early years, it signals an expectation that the workforce can be expanded by recruiting less-qualified individuals at lower cost. This has two consequences that this complaint submits are inseparable: it depresses wages in an already underpaid, overwhelmingly female profession, and it carries a direct and serious risk to the quality of provision received by the youngest and most vulnerable children in England. The confidence to safeguard children depends on staff who are bright, educated and professional. This failure has borne out in the high-profile cases of abuse and death of children where staff lacked either the knowledge or self-assurance to whistle-blow. The behaviour in this setting should have been flagged by any one of the staff. The government’s own stated ambition to improve child outcomes cannot be reconciled with a simultaneous policy of lowering the professional bar for those responsible for delivering it.

• Evidence was available and ignored: The sector provided research in 2015 demonstrating that adequate rates required a minimum of £7.49 per hour. Genuine “due regard” requires engaging with contrary evidence — not selectively relying on methodology that produces a lower figure. The DfE had this evidence and did not act on it.

• Absence of an adequate Equality Impact Assessment: We are not aware of any Equality Impact Assessment that specifically examines whether the funding rate methodology discriminates — directly or indirectly — against a 97% female workforce by undervaluing their skills and labour. The PSED requires this assessment to be conducted before decisions are made, not retrospectively. If such an assessment exists, we request that it be disclosed. If it does not, its absence is
itself a failure of the PSED. This analysis is consistent with the established legal principle from equal pay litigation in local government, where courts found that the systematic grading of feminised roles below comparable male- dominated roles constituted unlawful discrimination even absent any discriminatory intent. The mechanism is different here — it is government pricing rather than an employment relationship — but the underlying principle is directly analogous.

3. Flawed Methodology: The Staff Ratio Multiplier Error At a DfE Roadshow meeting with sector representatives took place in Norwich in May 2025. Dipal Patel, the Head of Early Years Funding at the DfE (a position she has held for nine years), was challenged on the inadequacy of the recent 3% funding rate increase against an 11% increase in provider costs. The response given was that providers should apply the staff-to-child ratio — for example, 1:4 for two-year-olds — as a multiplier to the percentage increase, making a 3% increase equivalent to a 12% increase in effective funding. This is mathematically incorrect. The staff-to-child ratio defines cost. It is not an income multiplier. Consider the following:

• One member of staff earning £25,000 per year supervises 4 children. The staff cost per child is £6,250.
• The government increases the funding rate by 3% — approximately 16.5p per child per hour on a £5.50 rate.
• Across 4 children, this is 66p per hour in additional income (£752 per year), while the same staff member now costs £2,750 more per year due to NMW and NIC increases.

The ratio does not multiply income. It describes how many children share the same underlying cost. A percentage increase applied to a partial funding contribution remains the same percentage regardless of how many children share a staff member. The ratio is the cost driver, not an amplifier of government subsidy. This bizarre methodology also fails to consider the staff members who are not included in ratios, and yet still need full salaries for the nursery to function. These are Managers, Administrators, Cleaners, and Gardeners, among others.

The gravity of this error lies not in a single misstep but in what it implies. The individual who offered this explanation has been responsible for early years funding methodology for 9 years. If this reasoning has informed internal assessments of funding adequacy during that period, it constitutes a material error in the evidence base underpinning a decade of funding decisions. To contextualise the scale of this failure over time: since 2010, the apprentice minimum wage has increased by 220%, the over-21 minimum wage by 114%, and the under-21 rate by 120%. Over the same period, the early years funding rate has increased by less than 50%. These are not independent variables — Government controls both the cost of labour and the funding provided to pay for it. It has consistently chosen, over many years, to increase one far faster than the other. Over a longer period of 25 years, the disparity is wider still, and for a significant part of that period, providers were permitted to charge top-up fees precisely because adequate funding was understood to be unavailable.

The removal of that permission, without any corresponding increase in the funded rate to compensate for it, represents the point at which an already underfunded system became an unviable one for many providers.

We ask that the DfE confirm in its response whether this multiplier logic has ever been part of its internal funding adequacy assessments. The DfE guidelines to Local Authorities suggests that this is, unfortunately, the incomprehensible way that funding is calculated, and that it is based on 100% occupancy, maximum ratios and cheap environments.

4. The CMA Context We note that the Secretary of State has recently written to the Competition and Markets Authority requesting an investigation into providers’ “hidden costs.” Sector representatives have themselves sought to engage the CMA regarding the Government’s role in distorting the early years market through systematic underfunding. We have been advised that the CMA cannot investigate government policy.

This asymmetry, in which private providers face regulatory scrutiny while the government’s own pricing decisions are insulated from equivalent challenge, is noted. It reinforces the importance of this formal complaint process as the appropriate mechanism for accountability.

A further and particularly stark contradiction exists. The government actively markets the Early Years Entitlement to parents as worth £8,000 per year; a specific monetary value assigned to the hours for public communications. Simultaneously, providers are required to deliver those same hours as ‘free at the point of delivery’ and are prohibited from assigning any monetary value to the funded hours on invoices or in communications with parents, despite the funded hours being (in most cases) significantly less than £8000 per year. This creates a deliberate information asymmetry. The government uses a monetary valuation to drive parental take-up and political goodwill, while preventing providers from communicating the reality of what those hours cost to deliver and what the government actually contributes. Parents are told the entitlement is worth £8,000. They are not told that providers in many areas receive the equivalent of under £5.50 per hour to deliver it, rates that have been below independently evidenced cost since at least 2017. Parents often think that the money paid is the same as the nursery’s usual rate. It is very often less than half. This restriction also directly suppresses the evidence of the equality failure described in Section 2. Providers cannot transparently demonstrate to parents (or the wider public) that Government’s pricing systematically undervalues a 97% female workforce. The gagging provision actively prevents the people most affected by this policy from understanding its true nature.

We submit that it is not moral for the Secretary of State to write to the CMA requesting an investigation into provider transparency while simultaneously prohibiting providers from disclosing truthful financial information to their own customers. These two positions are irreconcilable.
We are copying this complaint to the Chancellor of the Exchequer. The Treasury’s decision to increase employer National Insurance Contributions and the National Minimum Wage simultaneously, imposing an 11% cost increase on providers in a single year, while the DfE increased funding rates by only 3%, represents a failure of joined-up government. The two departments cannot be considered in isolation when their combined decisions determine whether early years providers can remain solvent.

5. The Top-Up Fee Prohibition: Compelled Loss-Making Providers are prohibited from charging top-up fees to parents for funded hours. This prohibition exists alongside a funding rate Government has known to be below cost since at least 2015. The combined effect is a closed system from which there is no lawful exit short of closure: Government sets rates below cost, prohibits cost recovery, and leaves providers with no legal mechanism to bridge the gap. We are not aware of any other sector in the United Kingdom in which private businesses are legally compelled to deliver a service at a government-set price, prohibited from charging more, and simultaneously denied a rate sufficient to cover their independently verified costs. This arrangement has no parallel in any regulated market. It constitutes, in effect, a compelled and uncompensated subsidy from private providers to the government childcare policy. The consequences of this prohibition are directly visible in the market. Providers who cannot absorb ongoing losses have been forced to develop workarounds — charging for consumables, registration fees, enhancement activities, and similar items — in order to remain solvent. These charges are not evidence of provider misconduct or a lack of transparency. They are the entirely predictable and direct consequence of Government policy: a rational response to being legally compelled to trade at a loss with no legitimate means of cost recovery. Many settings have closed altogether as a direct consequence of Government policy.

The government’s extraordinary two-tier funding arrangement further illustrates this inequality. Maintained nursery schools receive the same base rate as private and voluntary providers, plus a local authority top-up averaging £5.90 per hour and capped at £10, a supplement that is now explicitly unavailable to the private and voluntary sector and for which parents in that sector cannot legally substitute through top-up fees. This is represents a significant departure from the original Early Years voucher scheme introduced in late ‘90s, where not only was the funding a significantly higher percentage of the National
Minimum Wage (80% vs the current 42% for FOUR year olds, again pointing to the likelihood that funding is only 50% of where it needs to be), but parents were also able to ‘top up’ the voucher from their own resources in full should they choose a setting with higher fees. This could be due to personal preference, religious reasons, a family belief system, or simply because they felt that a particular nursery was a better fit for their child. (West and Noden 2016).

This disparity exists despite the fact that many private and voluntary providers bear costs that are directly comparable to those of maintained settings. They pay for buildings, rates, and VAT on everything that they purchase. They employ supernumerary managers who require high salaries, many of whom hold qualified teacher status — professionals whose expertise and responsibilities are equivalent to those of a headteacher. They accept and support children with Special Educational Needs and Disabilities, frequently with little or no additional financial support. They deliver the same statutory Early Years Foundation Stage framework, are subject to the same OFSTED inspection regime, and are held to the same safeguarding standards. They need caretakers, cleaners and admin staff as detailed in the DfE guidance section below.

The government’s justification for the maintained sector supplement — that higher standards warrant higher funding — implicitly classifies private and voluntary providers as inferior, and an admission that it is funding for ‘lower standards’.
A funding formula that provides materially different resources to providers delivering materially equivalent provision — while prohibiting the lower-funded group from any form of cost recovery — does not reflect a difference in quality. It reflects a difference in political status. The private and voluntary sector delivers the overwhelming majority of early years places in England. It is being systematically subsidised by its own workforce.

6. The DfE Guidance The DfE’s own statutory guidance on the Early Years Entitlement contains, at paragraph A1.38, an explicit list of costs that the funded rate must cover and for which providers are prohibited from charging parents separately. That list includes, verbatim: rent, mortgage payments, staff wages, cleaning materials, disposal of waste materials, insurance, and utility bills, including energy, gas and water. This appears to be a rather self-incriminating document, because it suggests that these things have been calculated into the funding rate. We would like to know how much money has been assigned per hour for these items.

The prohibition extends, by the guidance’s own ‘not limited to’ formulation, to business rates, a statutory charge levied by Government itself on provider premises, which Government simultaneously refuses to fund adequately and prohibits providers from recovering through any supplementary charge.

And these are not exceptional costs. They are the irreducible minimum costs of operating any business in any sector. Government has therefore explicitly acknowledged that the funded rate is intended to cover every normal cost of running a childcare setting — while simultaneously setting a rate that independent research conducted in 2015 demonstrated
was already inadequate to cover those costs, and which has fallen further behind in real terms every year since.

This is not an oversight. The guidance at A1.38 also explicitly prohibits ‘sustainability charges’ and ‘business continuity charges’ — terms Government has specifically anticipated and banned by name. The DfE therefore knew, when drafting this guidance, that providers facing financial pressure would seek to recover costs through such mechanisms.

It chose to prohibit them rather than address the underlying funding inadequacy. It has since referred providers to the CMA for the consequences of that choice.

The guidance creates a further internal contradiction. Paragraph A1.32 permits providers to charge for consumables. Paragraph A1.38 prohibits charging for ‘craft materials, crayons, paper, books, instruments, toys, or other equipment or learning resources that are necessary for the effective delivery of the Early Years Foundation Stage.’ Since virtually all materials in an early years setting are necessary for effective EYFS delivery, this distinction is unworkable in practice. It creates deliberate ambiguity that exposes providers to regulatory risk for decisions that are, in reality, unavoidable. Paragraph A1.38 also prohibits charging for ‘additional support costs for children with special educational needs and disabilities as part of their entitlement hours.’

Providers are therefore required to absorb SEND support costs at a funded rate set with no reference to the SEND profiles of individual settings, and with no mechanism to recover the additional costs that SEND provision demonstrably entails. Many providers accept children with significant additional needs as a matter of professional commitment and legal obligation — and are explicitly prohibited from recovering the cost of doing so.

Paragraph A1.37 requires that all children receive the same quality of provision regardless of whether their parents pay for any chargeable extras. A child whose parents opt out of every permissible charge must receive the same quality of provision as one whose parents contribute to meals, consumables and activities. The entire financial shortfall created by that opt-out must be absorbed by the provider — a provider already trading below cost on the funded rate itself.

Taken together, this guidance describes a closed financial system from which there is no lawful exit. The government has acknowledged every cost a provider bears, set a rate known to be insufficient to cover those costs, prohibited every mechanism of recovery, mandated equal quality regardless of parental contribution, and specifically anticipated and banned by name the charges providers have developed in response. It has then referred those charges to the CMA as evidence of provider misconduct.

We submit that this guidance, read alongside the evidence of chronic underfunding set out in this complaint, is self-incriminating. It demonstrates that the Department was fully aware of the cost base it was obligated to fund, fully aware that its rate was inadequate to meet it, and chose to prohibit cost recovery rather than address the funding gap. No reasonable
reading of this guidance, in the context of the evidence available to the Department since 2015, is consistent with good faith in the administration of a statutory entitlement. It is therefore deeply troubling that the Secretary of State has referred any ‘workarounds’ to the CMA as hidden costs requiring investigation. The government created the conditions that made charges necessary, banned the legitimate alternative, and is now investigating providers for the result. We submit that this sequence of events — in which the government is both the cause of the problem and the author of the investigation into its symptoms —
represents a serious failure of regulatory good faith.

We further note that the top-up fee prohibition may engage the right to peaceful enjoyment of possessions under Article 1, Protocol 1 of the Human Rights Act 1998. Compelling a private business to deliver a service at below cost, while prohibiting any mechanism of cost recovery, is a significant interference with property rights. We invite the Department to address this in its response.

7. The Propaganda The government’s public communications surrounding the Early Years Entitlement have caused damage that extends beyond the financial. A sustained campaign presenting the entitlement as ‘free’ while providers absorb losses, close settings, and reduce places has actively pitted parents against the professionals they rely on to care for and educate their children. Providers who attempt to explain the funding reality to parents risk being cast as ungrateful, greedy, or dishonest. Those who charge for consumables or activities to remain solvent are referred to the CMA. Those who close are blamed for abandoning families.

This is the direct consequence of a government communications strategy that has prioritised political optics over honest public information. The relationship between early years providers and the families they serve is one of the most important in a child’s life and must be built on trust, continuity and shared commitment to the child’s wellbeing. The government’s approach to communicating this policy has systematically undermined that relationship. That is not an incidental side effect. It is the predictable outcome of telling parents that provision is free while ensuring that providers cannot publicly say otherwise.

8. What We Ask

We request the following:

1. An independent review of the early years funding rate methodology, including its underlying cost modelling and the evidence base used.

2. Disclosure of any Equality Impact Assessment conducted specifically on the funding rate methodology and its effect on the early years workforce.

3. If no such EqIA exists, a commitment to commission one conducted by an independent body, with sector input.

4. A written response confirming whether the staff ratio multiplier reasoning described in Section 3 has ever formed part of the DfE’s internal assessment of funding adequacy.

5. A substantive response to this complaint within eight weeks, in accordance with the Parliamentary and Health Service Ombudsman’s complaint handling standards.

We do not oppose the government subsidy of early years provision. We propose that a means-tested subsidy paid directly into parents’ Tax-Free Childcare accounts would achieve the Government’s stated objectives of affordability and accessibility more effectively and more transparently than the current system, without compelling providers to trade at a loss, without creating perverse incentives for hidden charges, and without the inequality of an asymmetric funding formula that has never been subjected to an equality impact assessment. Tax-free childcare payments made directly to parents would also negate the large amounts taken from the funding by each local authority. Local authorities are permitted to retain a proportion of the early years funding allocated by the DfE before passing it to providers — commonly referred to as the ‘top-slice’. While the percentage varies by local authority, the cumulative effect across England amounts to many millions of pounds annually that never reach the settings responsible for delivering the provision. Some local authorities have retained amounts running into millions of pounds in a single year. This top-slice further compounds the gap between the headline funding rate and what providers actually receive — yet it is providers, not local authorities, who face regulatory scrutiny for the resulting financial pressures.

We note that failure to respond substantively within eight weeks, or a response that does not address the specific failings identified in this complaint, will result in escalation to the Parliamentary and Health Service Ombudsman.

Yours faithfully,

Free Childcare UK: The Untold Story

enquiries@freechildcareuk.co.uk

28 May 2026

Note: This complaint is submitted as a formal complaint for the purposes of escalation to
the Parliamentary and Health Service Ombudsman in the event it is not resolved
satisfactorily. All correspondence should be retained accordingly.