Final DfE Complaint

FORMAL 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.