Early years funding in England

The government has said it will consult on changes to the early years funding system in summer 2026.

Free childcare entitlements

Most government support for childcare providers in England is delivered via funding for the entitlements to government-funded childcare:

• 15 hours a week universal entitlement for all three and four-year-olds.
• 15 hours a week entitlement for two-year-olds receiving additional support.
• Extended 30 hours a week entitlement for children aged from nine months to four years from eligible working families.

The working families entitlement was previously only available to three- and four-year-olds but since April 2024 it has been extended in stages to younger children. The rollout was completed in September 2025.

Funding rates

Funding for the childcare entitlements is distributed to childcare providers in two stages:

1. The Department for Education provides funding to local authorities in the early years block of each authority’s dedicated schools grant.
2. Local authorities then distribute funding to providers in their areas, within a framework set by the department.

The national average hourly funding rates for local authorities in 2026/27 are:

• Three and four-year-olds: £6.42 per hour. This is a 4.9% cash-terms increase from 2025/26. However, the rate has fallen by around 1% in real terms (when adjusted for inflation) since 2017/18 (in 2024/25 prices).
• Two-year-olds: £8.90 per hour, a 4.3% cash-terms increase from 2025/26. The rate has increased by around 21% in real-terms since 2017/18, largely due to significant additional funding announced at the Spring Budget 2023.
• Children under two: £12.04 per hour, a 4.3% cash-terms increase from £11.54 in 2025/26.

Commentary on funding levels

DfE analysis published in May 2026 estimated the median income-to-cost-ratio (total weekly income divided by total weekly cost) for early years providers in 2025 was £1.01 of income per £1 of cost. This means just under half of childcare providers reported income that did not fully cover their costs.

In its 2025/26 annual report on education spending, the Institute for Fiscal Studies think tank said that, while funding rates for children aged two and under “exceed market prices”, the rates for three-and four-year-olds are “less than market prices”.

The report noted that many costs for childcare providers have risen more quickly than economy-wide inflation. It estimated that once childcare-provider-costs are taken into account, core funding per hour for three- and four-year-olds in 2025/26 was 19% lower than a decade ago. Funding rates for two-year-olds had risen by 17% over the decade. 

Funding the childcare expansion

The expansion of the working families entitlement to younger children has led to a substantial increase in early years funding. The previous government estimated the expansion would cost an additional £4.1 billion a year by 2027/28. By this time, the government expected to be spending around £8 billion on the childcare entitlements in total, around double what was spent in 2023/24.

The Institute for Fiscal Studies has noted, however, that spending on the expansion could “could easily end up £1 billion higher” than estimated due to higher than expected take-up rates. It added that additional funding announced by the government at the Spending Review 2025 would “go some way to closing the gap”, but could still leave additional funding pressure.