The UK government funds early years childcare through the Early Years National Funding Formula (EYNFF), which sets hourly funding rates paid to local authorities and then passed to nurseries. These rates vary by age group and area, and they are often presented as the foundation of ‘free childcare’, but they do not cover the full cost of delivering high-quality care.
According to the Department for Education’s funding tables for 2025–26:
• The national AVERAGE hourly funding rate for 3- and 4-year-olds is £6.12. This takes into account the higher rate for London boroughs however – the mean average outside of that area is closer to £4.85
• For two-year-olds, it’s £8.53 per hour (again less in most areas)
• For under-2s, the average rate is £11.54 per hour (again, closer to £9 in areas outside of London)
These figures may look reasonable in isolation, but when you compare them to the real costs of staffing, premises, overheads, consumables, and statutory requirements, the gap is stark.
Official research from the Department for Education’s own provider surveys shows that many settings can’t cover their costs:
• More than half of providers reported that their income did not cover their costs in the 2024–25 early years period.
• In autumn 2024–25 ‘Pulse’ surveys, 48% of group-based providers said funding rates made additional funded places not worthwhile, and many settings reported ongoing staffing shortages and high vacancy times.
This official data clearly shows that funding is not aligned with real market costs – a finding reflected in independent sector research as well.
Below are the significant operational costs that government funding does not fully cover, despite these being essential to running a childcare setting:
1) Leadership and Management
There is no separate funding uplift for setting managers, directors, or leadership time. Every funded hour is calculated on the assumption that staff time contributes to ratios, not to leadership, planning or oversight. Yet leadership is essential for safeguarding, compliance, quality assurance and day-to-day decision-making.
2) Finance and Administration
Government funding doesn’t explicitly cover:
• bookkeeping and payroll
• funding claims
• invoicing and debt management
• reporting to Local Authorities or Ofsted
This administrative burden is often absorbed by managers and practitioners – unpaid or squeezed into hours already dedicated to child contact time.
3) Premises, Safety, Maintenance and Compliance
Funding pays only for ‘care hours’ not
• planned and reactive maintenance of buildings
• fire safety or risk assessments
• health and safety compliance
• upgrades required by regulation changes
Nurseries lease or run buildings that require continual investment – costs that cannot be met by hourly funding alone.
4) Cleaning, Hygiene and Refuse Disposal (Including Nappy & Sanitary Waste)
Cleanliness and waste management are statutory requirements, especially important in early years settings.
Yet funding does not adequately cover:
• daily cleaning
• deep cleaning and infection control
• cleaning materials and equipment
• contracted refuse disposal services
• specialist nappy and sanitary waste disposal
These are recurring, unavoidable costs, and licensed waste disposal (e.g., for nappies and adult sanitary bins) carries its own regulated cost that nurseries must absorb or pass back to parents.
5) Staff Pay, Holidays, Sick Pay and Pensions
The government’s funding rates are meant to contribute toward staffing costs, but they don’t include
• fully funded paid annual leave
• statutory sick pay
• employer pension contributions beyond the minimum
• parity with other early years professions
According to the Early Years Alliance’s sector evidence, 63% of early years staff considering leaving the sector cited low pay and feeling undervalued,
indicating that funding fails to support sustainable careers.
6) Training, CPD and Qualifications
Ongoing training (e.g., child protection, SEND, specialist skills) is mandatory and essential, but funding doesn’t offer separate provision for this, nor does it cover the lost ratio hours when staff train.
7) Learning Resources and Enrichment Activities
Nurseries are inspected on the richness of their curriculum, yet funding covers only baseline care hours, not:
• diverse resources
• specialised teaching materials
• visitors and trips
• creative and sensory resources
These items are typically paid for by parents, because funding simply doesn’t stretch that far.
8) Inclusion and Additional Needs Support
Supporting children with additional needs (SEND) requires:
• one-to-one or additional staff time
• specialist equipment
• tailored training
• liaison with external agencies
Although there is a SEND inclusion fund, it is often limited and inconsistent,
leaving settings to subsidise inclusion themselves.
Even on staffing levels, official surveys raise alarm bells
• The number of registered childcare providers fell by 1% between 2024 and 2025.
• Staff vacancy times remain long,
with many providers advertising roles for several months before filling them.
This reflects a workforce under pressure and supports the conclusion that funded hours alone aren’t enough to maintain a stable, high-quality childcare sector.
Government funding for early years, widely promoted through entitlements like 30 free hours, is a significant policy tool. But official funding tables and provider surveys show that these funded hours are not fully funding the cost of running childcare at the level families and regulators expect.
Funding pays for the hours.
It does not properly fund:
• leadership and management
• core operational costs
• compliance with health and safety
• proper staffing conditions
• professional development
• essential consumables and waste disposal
• real resource-rich learning environments
Until funding reflects the full cost of high-quality early years provision, including all of these hidden or unfunded costs, nurseries will continue to struggle financially, pass costs to parents, or reduce services and quality in response.
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This is one of the most comprehensive summaries of the funding situation I have read. A concern that may not have been addressed is the cost of staff sickness, which companies have to pay for, in addition to finding cover to ensure ratio compliance, and this is certainly not covered by the funding. PPE equipment is not required for nappy changes (optional), and such costs cannot be charged to consumables. The funding is stifling the Early Years Economy with all the restrictions upon settings if they choose to accept this; if they don’t, parents lose out on a child’s allocation of funding. Equally, each setting has its own set of expenses relative to location, building, and business rates. For example, the setting is housed in a regency house of interest, a conservation area, a large garden area, high business rates, which bring a set of higher additional costs, and whilst a business choice, families choose us for this, all settings receive the same amount and are told they can’t charge for anything other than the limited consumables. So, to put this into perspective, a church hall running a playgroup receives the same amount of funding, yet costs are clearly more variable, and the consumable charge is the same for all. This makes no sense, and I am unaware of any other private industry governed by such restrictions. It certainly didn’t work in the dentistry industry.
This is one of the most comprehensive summaries of the funding situation I have read. A concern that may not have been addressed is the cost of staff sickness, which companies have to pay for, in addition to finding cover to ensure ratio compliance, and this is certainly not covered by the funding. PPE equipment is not required for nappy changes (optional), and such costs cannot be charged to consumables. The funding is stifling the Early Years Economy with all the restrictions upon settings if they choose to accept this; if they don’t, parents lose out on a child’s allocation of funding. Equally, each setting has its own set of expenses relative to location, building, and business rates. For example, the setting is housed in a regency house of interest, a conservation area, a large garden area, high business rates, which bring a set of higher additional costs, and whilst a business choice, families choose us for this, all settings receive the same amount and are told they can’t charge for anything other than the limited consumables. So, to put this into perspective, a village hall running a playgroup receives the same amount of funding, yet costs are clearly more variable, and the consumable charge is the same for all. This makes no sense, and I am unaware of any other private industry governed by such restrictions. It certainly didn’t work in the dentistry industry.