Nursery Funding – Is the System Working?

With recent policy expansions into younger age groups and pressure on providers, many question whether the system is delivering equitably for children, parents, and early years settings.

Here’s an updated look at how nursery funding is functioning, and where it’s falling short.

1. The Current Funding Landscape: What Has Changed?

Expansion of funded hours into younger ages

Recent reforms have extended eligibility for funded hours into younger age brackets:

• From April 2024, 15 funded hours were made available for eligible 2-year-olds in certain circumstances and to children aged 9 to 23 months.
• Plans to further expand to 30 hours for those under 3 are pending in some jurisdictions.

These moves aim to ease the burden on working families and support early development from infancy.

Uptake trends & registration figures

• The number of 3- and 4-year-olds registered under the universal entitlement fell to 1.16 million in 2025, a 1.2 % drop from the year before, the lowest in this statistical series.
• For 2-year-olds in the disadvantaged (“Families Receiving Additional Support,” FRAS) scheme, registration fell more sharply: down 18 % between 2024 and 2025.
• Meanwhile, the new working parent entitlement (ages 9 months to 2) saw higher registration: ~73 % of eligible children.

These diverging trends suggest uptake is uneven across programmes and cohorts.

Cost pressures & underfunding

• Even with recent uplifts, funding rates for 3- and 4-year-olds have not kept pace with rising provider costs. The “real-terms gap” is now estimated at around 8 % relative to 2016-17 norms.
• Under inflation, wage pressures, utilities, rent, and rising regulatory burdens strongly affect small nursery and childminder providers.
• Many providers say that the rates they receive for delivering funded hours don’t cover delivery costs, especially for younger children or in less densely populated areas.

2. Key Challenges: Where the System Is Fraying

A. Unequal access and “childcare deserts”

• Among the poorest fifth of families, only about 36 % use formal childcare, versus ~73 % of the highest-earning households.
• In deprived or rural areas, access is worse: fewer nursery places per child and fewer “good” rated providers.
• The recent policy push to open school-based nurseries has triggered controversy: in some cases, existing private or voluntary (PVI) nurseries have been evicted to make way for new school-run provision, potentially reducing overall capacity.

B. Provider sustainability & funding shortfalls

• Many providers feel squeezed: constrained by the requirement not to charge for certain extras, while facing rising wages and fixed costs.
• Some nurseries are already signaling they may limit the number of funded places they offer, particularly for 3- and 4-year-olds.
• The shift toward school-based nurseries might centralise control and risk destabilising smaller local providers. The Early Years Alliance has warned that some existing preschools are being asked to leave school premises.

C. Demand vs registration disparity

• While eligibility and registration numbers may rise, actual take-up lags—especially among more disadvantaged families.
• Some families may not engage with entitlement schemes due to awareness, administrative complexity, or mismatches in hours offered vs need.

D. Quality maintenance under pressure

• With funding tight, providers may cut costs in staff numbers, training, or physical resources, potentially affecting quality.
• Maintaining staff recruitment and retention is difficult when pay in early years often lags behind equivalent sectors.

3. Impact in Practice: Effects on Families, Settings & Children

For families

• Promised free hours are a lifeline for working parents, but if local supply is limited or oversubscribed, the value is lost.
• Some parents may still face “top-up” costs for meals, trips, or additional hours not covered by entitlement, sometimes reluctantly accepted by providers striving to break even.
• In areas where school-based nurseries usurp PVI provision, families may lose access to familiar local settings.

For nursery providers, childminders, PVIs

• Financial strain: many PVI settings operate on tight margins.
• Uncertainty in planning: fluctuating funding, shifting policy, and variable demand make staff and space decisions risky.
• Tension with local authorities or schools over leasing, premises, and partnership terms.
• Some smaller or rural providers may be unviable and shut, reducing community-level resilience.

For children & equity

• Children in under-served or deprived areas risk missing out on the early years support intended by funding expansions.
• Where providers cut staffing or resources, the quality of early education may suffer, undermining developmental returns.
• The mismatch in uptake across socio-economic groups may exacerbate inequality.

4. What “Works Well” & International Comparisons

Supporting supply-side funding

• Some expert analyses argue the UK needs stronger supply-side investment, directly funding providers to cover fixed costs and ensure quality rather than relying solely on demand-side subsidies.
• International systems (e.g. in parts of Scandinavia, France) routinely subsidise providers rather than parents, prioritising quality control and sustainability.

Strategic local planning & partnerships

• Local authorities, schools, providers and stakeholders need integrated planning to manage where capacity is needed, how to co-locate, and share resources.
• Effective leasing models, shared premises, and coordinated expansion (rather than rivalry) help preserve diverse provision.

Transparent and fair rates

• Ensuring funding rates reflect real costs, including for younger children, travel, premises, and recruitment, is critical.
• Differentiated rates may be justified in rural or high-cost regions.

Support for smaller / rural settings

• Special support (grants, subsidies, wraparound services) for providers in fragile or rural areas helps maintain equitable access.
• Flexibility in delivery models—e.g. outreach satellite provision, mixed age settings—may help viability.

Monitoring, evaluation & continuous data

• Robust data on registration, take-up, quality outcomes, provider viability should inform funding reviews.
• Mechanisms to detect “childcare deserts” early and intervene.

5. What Can Schools, Local Authorities & Leaders Do?

• Advocate for realistic funding: Use your local voice to push for funding aligned to actual delivery costs, not politically rounded figures.
• Partner with existing providers: Rather than displacing PVI nurseries, explore collaboration, joint use of premises, or shared governance.
• Support flexibility in hours: Offer wraparound, flexible scheduling, or supplement hours to fit families’ needs.
• Monitor access and usage: Track which wards or communities lack uptake, and invest targeted outreach.
• Quality assurance oversight: Work with local nurseries to maintain training, governance, and safeguarding even under tight budgets.
• Plan expansion strategically: If your school will host or expand nursery provision, model demand, costs, and sustainability carefully before committing.

Conclusion

Nursery funding expansion is a bold and essential pathway toward greater equality and support for families. Yet the system’s current strain and inequality in uptake signal that it’s not yet working equitably or sustainably.

Bridging the gap between policy ambition and on-the-ground reality requires stronger funding alignment, support for providers (especially in disadvantaged or rural areas), local strategic planning, and continuous oversight.

To explore how Equitas supports early years recruitment, nursery partnerships, and ensuring quality in the face of funding pressure, visit equitasstaffing.com or contact us at contact@equitasstaffing.com.